Oil prices fall to near $126 a barrel

Oil prices fell to near $126 a barrel Friday in Asia, extending a decline of more than $4 in the previous session despite a huge unexpected drop in U.S. crude oil stocks.

The U.S. Energy Department's Energy Information Administration said delays in unloading oil tankers along the Gulf Coast had led to the 8.8 million-barrel drop in crude oil inventories for the week ended May 23. Analysts surveyed by Platts had expected a gain of 750,000 barrels. Usually such a discrepancy would send prices soaring.

"It was so unexpected that the majority of traders simply brushed it off ... as not a reliable indication," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore.

"It was such a deviation from expectations, so probably there was some problem in the reporting," he said, and traders were willing to accept the EIA explanation that it was a timing issue on imports.

Traders instead focused on gains in the U.S. dollar, he said, which hit a three-month high against the yen overnight. In Asia currency trading in Tokyo, the dollar has held near 105.50 yen, while the euro is trading around $1.55.

Investors who buy commodities such as oil as a hedge against inflation when the dollar is falling tend to sell when the greenback strengthens. Also, a stronger dollar makes oil more expensive to investors dealing in foreign currencies.

Midday in Singapore, light, sweet crude for July delivery was down 33 cents at $126.29 a barrel in electronic trade on the New York Mercantile Exchange.

The contract fell $4.41 to settle at $126.62 a barrel overnight, the lowest settlement in two weeks and the biggest single-day price drop since March 19.

"The market has lost some attraction on the upside," Shum said.

Concerns about U.S. gasoline demand also weighed on prices, with many investors and analysts expecting record high retail prices to continue to impinge on American driving habits.

In Washington, meanwhile, the Commodity Futures Trading Commission revealed that it is six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation. The CFTC also announced a handful of initiatives designed to increase transparency of the energy futures markets.

Disclosure of the investigation may have contributed to oil's declines, analysts said.

In its weekly inventory report, the EIA also said gasoline supplies fell 3.2 million barrels. Analysts surveyed by energy research firm Platts had expected an increase of 400,000 barrels.

But the EIA also offered a rare explanatory note on the Gulf Coast tanker problems, and Phil Flynn, an analyst at Alaron Trading Corp. in Chicago, said Gulf ports have closed many times in recent months due to fog.

Also putting some weight on prices were supplies of distillates, including heating oil and diesel fuel, which the EIA said rose 1.6 million barrels last week, double what analysts had expected.

In other Nymex trading, heating oil futures were flat at $3.6885 a gallon while gasoline prices dropped 0.92 cent to $3.395 a gallon. Natural gas futures rose 2.6 cents to $11.50 per 1,000 cubic feet.

In London, July Brent crude fell 33 cents to $126.56 a barrel on the ICE Futures exchange.