Oil drops on concerns of glut in refined products

By Ron Bousso

LONDON (Reuters) - Oil dropped on Monday as signs of a growing glut in refined products outweighed a fall in Saudi crude exports and slower U.S. rig activity.

Crude prices have fallen for three weeks in a row on expectations of increased oil sales from Iran following a deal to ease sanctions against the OPEC producer.

Brent crude for September was down 45 cents at $56.65 a barrel by 1330 GMT. The benchmark fell nearly 3 percent last week and is down more than 10 percent so far this month.

U.S. crude futures for August were down 27 cents at $50.62 a barrel. The August contract expires on Tuesday.

The dollar's strengthening added further pressure as it makes dollar-priced commodities more expensive for investors using other currencies.

Saudi Arabia's crude exports fell in May to their lowest since December, with official data showing daily shipments at 6.935 million barrels per day (bpd) compared with 7.737 million bpd in April, despite record-high output of over 10 million bpd.

In the United States, drillers cut seven oil rigs last week following two weeks of increases, according to a closely watched report by oil services company Baker Hughes Inc .

However, as refineries around the world continue to operate at near-maximum levels to benefit from strong profit margins, there are signs a glut in the crude oil market may be shifting to refined products.

"The big fall in U.S. rig counts since last September has not had a negative impact on domestic production and the reduction in Saudi crude oil exports is due to domestic refinery demand as the Kingdom is turning into a significant product exporter," analysts at PVM wrote.

Refined product inventories at Europe's Amsterdam-Rotterdam-Antwerp storage hub rose to an all-time record last week. [ARA/]

Strong increases in refinery operations in recent months are set to slow in the second half of this year, hitting demand for crude oil, Vienna-based consultancy JBC Energy said:

"We expect global crude runs to be in the process of peaking for this year."

(Additional reporting by Jacob Gronholt-Pedersen; Editing by Christopher Johnson and Dale Hudson)