Oil falls below $80 as U.S. inventories rise

Oil dropped below $80 a barrel on Wednesday to its lowest this year, pressured by a U.S. inventory report showing rises in crude and distillate fuel stocks despite severe winter weather.

Crude stocks, expected to rise 1.2 million barrels, increased by 3.7 million, the Energy Information Administration said. Inventories of distillates, forecast to fall, rose by 1.4 million barrels.

"It's a bearish report that points back to weak underlying fundamentals in the domestic petroleum market," said Gene McGillian, analyst at Tradition Energy in Stamford, Connecticut.

"Distillate stocks are up despite the cold weather last week, which means there was no demand for anything except the heating oil." U.S. crude for February was down $1.42 at $79.37 by 1558 GMT. It fell as low as $78.37, the lowest since Dec. 29. Brent crude for February, which expires on Thursday, fell $1.42 to $77.88.

The price of U.S. crude has fallen more than $4 from a 15-month high of $83.95 reached on Monday and some analysts believe it could have further to fall.

"It is becoming increasingly apparent that the upside breakout above key $82 resistance seen last week never got going and seems to have been no more than a short-lived burst higher," said Edward Meir of MF Global in a report.

Oil inventories have bulged in the United States over the past 18 months as the economic crisis has cut energy demand. Very cold weather over the last two weeks was expected to have helped to erode stocks.

Warmer weather across the central and eastern United States is expected to arrive in the next few days, DTN Meteorlogix said, reducing heating demand.

The EIA report followed figures from industry group the American Petroleum Institute, (API) which said in its report on Tuesday distillate stocks rose by 3.6 million barrels.

Oil was pressured on Tuesday by China's move to raise banks' cash reserve requirements, the latest step towards tightening monetary policy, which some traders see potentially dampening energy demand.

China is the world's second-largest oil consumer after the United States.