Oil down after early rally on U.S. crude draw; stockpiles still hefty

By Barani Krishnan

NEW YORK (Reuters) - Oil prices fell after initially rallying on Wednesday as worries about huge supplies weighed on the market despite a second straight week of draws in U.S. crude.

Government data showed U.S. oil inventories fell 2.2 million barrels in the week to May 8, to below 485 million barrels, compared with analysts' expectations for a rise of 386,000 barrels. Gasoline and distillate stockpiles also declined. [EIA/S]

But with stocks at nearly 90 million barrels more than a year ago, analysts and traders are also expecting production and imports to fall rapidly, something that has yet to occur.

Crude prices rallied right after the Energy Information Administration (EIA) issued its latest supply-demand data, which included last week's draws. But the market came off its highs soon after, and eventually settled down.

"It looks like a buy the rumor, sell the news event," said John Kilduff, partner at New York energy hedge fund Again Capital.

U.S. crude futures settled down 25 cents at $60.50 a barrel, after rallying to $61.85.

North Sea Brent futures settled at $66.81, down 5 cents. It had surged to $68.17 earlier.

Crude futures have risen between 20 percent and 25 percent over the past six weeks on signs that increasing demand ahead of the peak U.S. driving season could ease a supply glut.

"We are still about 20 percent higher than a year ago in terms of inventories," said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow, New York.

"We need to lose at least 1.5 million barrels a day from production to balance the market, but that seems not likely with the marginal cuts in U.S. output so far and OPEC looking to produce as much as it can into this market."

Oil was also supported earlier in the day by the dollar's plunge to a three-month low against a basket of currencies, following weak retail sales data for April.

Some said the EIA report signalled improved fundamentals for U.S. crude, citing the near 1 million-barrel drop in supply at the crude futures delivery hub of Cushing, Oklahoma, as one example.

But others argued that refinery runs were down last week while imports and production both showed an uptick. "To me, the data still looks suspect," said Dominick Chirichella, partner at the Energy Management Institute in New York.

(Additional reporting by Christopher Johnson and Himanshu Ojha in London and Florence Tan in Singapore; Editing by Marguerita Choy and Ted Botha)