Oil prices drop ahead of U.S. inventory report, balance previous day's gains

Oil prices fell Wednesday as the morning market adjusted after large gains the day before and awaited the weekly U.S. inventories report, which was expected to show an increase of gasoline stockpiles but a fall in distillates such as heating oil.

Oil and natural gas prices jumped Tuesday on expectations of more cold weather in the United States and renewed concerns about OPEC production cuts. Oil traded as high as US$57.05 before falling back to settle at US$56.97 a barrel, a gain of US$2.96.

On Wednesday, early trading seemed to be adjusting those price gains. Light, sweet crude for March delivery fell 42 cents to US$56.55 in midmorning Asian electronic trading on the New York Mercantile Exchange.

Natural gas dropped 7.3 cents to US$7.667 per 1,000 cubic feet. A day earlier, it had soared more than 80 cents, or 11.6 percent.

The market has been responding to forecasts that predict temperatures will dip below freezing in the U.S. Midwest, the heart of the natural gas market.

Colder-than-normal temperatures are also expected through mid-February in the Northeast, which is responsible for 80 percent of the country's heating oil consumption.

Heating oil on Wednesday fell half a cent to US$1.6330 a gallon.

Crude oil also received a boost Tuesday from a Wall Street Journal report that said Saudi Arabia has told its customers it will cut supply by a further 158,000 barrels a day, effective Feb. 1.

This appeared to conflict earlier remarks by Turki al-Faisal, outgoing Saudi ambassador to the United States, who said his country did not favor further production cuts. His remarks, reported by Dow Jones Newswires, caused prices to fall more than US$1 on Monday.

Saudi Arabia is the biggest producer in the Organization of Petroleum Exporting Countries, which said it would begin cutting production by 1.2 million barrels a day in November. Some traders have speculated that a few cartel members were not complying. The group said late last year it planned to cut production an additional 500,000 barrels a day starting Feb. 1, reports AP.

The markets are also looking ahead to the weekly report on U.S. inventories on Wednesday.

U.S. crude imports are expected to have risen by 1.2 million barrels in the week ended Jan. 26, according to a survey of analysts by Dow Jones Newswires. Gasoline stockpiles are expected to gain 1.6 million barrels, while distillate stockpiles, which include heating oil and diesel, are seen falling by 2.6 million barrels.

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