Oil prices dropped below $66 a barrel Tuesday amid expectations that gasoline supplies rose for the sixth straight week, easing worries of a crunch during the summer vacation season.
The losses came as other commodities markets also dipped into negative territory, pressured by prospects that rising inflation may force tighter monetary policy, spelling weaker growth in demand for commodities.
Crude settled down 62 cents at $65.35.
After yesterday's bullish action, markets failed to find any upside follow through today, said Tom Bentz, BNP Paribas Commodity Futures Inc.
Analysts said they expected a U.S. government report Wednesday to show the sixth consecutive weekly increase in gasoline stockpiles last week, offsetting steep declines in inventories since winter.
U.S. gasoline inventories were expected to have risen by 1.7 million barrels on higher refinery output and strong imports, a Reuters survey found. Crude stocks, meanwhile, are expected to have fallen 500,000 barrels.
Prices had earlier rebounded when the International Energy Agency raised its 2007 oil demand forecast and said in its monthly report that OPEC had tightened the taps too far.
The IEA, representing 26 industrialized nations, voiced concern that consumer nations' oil stocks were headed toward the low levels of 2004 when oil prices surged from below $30 to $50. Rising demand for OPEC oil, meanwhile, would soon outpace capacity additions, the agency said.
We would very much hope that OPEC production is at its seasonal low at the moment, IEA supply analyst David Fyfe said. We definitely do need more crude oil.
OPEC agreed at two meetings since late last year to cut supplies by a total 1.7 million barrels per day, or roughly 6 percent. The move, coupled with low gasoline stocks in top consumer the United States, helped to lift oil from about $50 in January.
The report points to a considerable tightening of market balances, Lehman Brothers analyst Ashutosh Agrawal said.
Barclays Capital analysts doubted OPEC would raise its oil output rapidly enough. Thus, significantly higher oil prices over the second half of 2007 look inevitable.
Consumer nations are also on edge because of supply disruptions in Nigeria, where militant attacks have shut 26 percent of the country's three million bpd production capacity.
There are, of course, uncertainties, which could shift the market. Nigeria, geopolitics, economic growth and the weather could swing the balances in either direction, the IEA said.
But, even with these caveats, it seems difficult to escape the conclusion that the oil market will be tight in the second half of the year.