Oil drops on worries of swelling U.S. stockpiles

By Devika Krishna Kumar

NEW YORK (Reuters) - Oil prices fell about 1.5 percent on Wednesday on expectations of another surge in U.S. inventories, but they traded close to multi-week highs after OPEC signalled optimism over its deal with other producers to curb output.

Analysts polled ahead of weekly inventory reports from industry group the American Petroleum Institute (API) and the U.S. Department of Energy's Energy Information Administration (EIA) estimated, on average, that crude stocks increased by about 3.3 million barrels last week, its seventh weekly build.

The API is scheduled to release its data at 4:30 p.m. EST (2130 GMT), while EIA data is due at 11 a.m. EST on Thursday, both delayed a day because of the federal holiday on Monday.

The U.S. West Texas Intermediate crude April contract , the new front-month future, was down 83 cents, or 1.5 percent, at $53.50 a barrel by 12:06 p.m. EST (1706 GMT).

Brent crude was down 90 cents, or 1.6 percent, at $55.76, having touched its highest since Feb. 2 at $55.89 in the previous session.

"We've seen a fairly significant increase in crude stocks since the beginning of the year and the market has been able to maintain its relative buoyancy," Andrew Lebow, senior partner at Commodity Research Group in Darien, Connecticut, said.

"I think the underlying sentiment is bullish ... what's been key to the market is you've seen the tightening of the spreads, especially in the front."

The discount of the prompt WTI contract to the second month , also called the contango, rallied to as little as 26 cents per barrel, its narrowest since Oct. 20.

Brent crude's time spread came within cents of flipping into backwardation - when prompt barrels are more expensive than later supplies - on Tuesday amid the Organization of the Petroleum Exporting Countries' optimism over the deal under the OPEC umbrella to curb production.

On Tuesday, OPEC Secretary General Mohammad Barkindo said the group and other producers including Russia will boost compliance with agreed output curbs in a bid to clear a supply glut and boost prices.

Goldman Sachs reiterated its outlook for a recovery in prices in the second quarter - WTI to rise to $57.50 and Brent to $59 - before declining to $55 for WTI and $57 for Brent for the rest of the year.

The investment bank said "while the reduction in oil supplies out of core OPEC in the Gulf and Russia has exceeded our and consensus expectations, the market is starting to doubt that this will be sufficient to translate into large oil inventory draws by the second quarter."

(Additional reporting by Sabina Zawadzki in London and Aaron Sheldrick in Tokyo; Editing by Marguerita Choy and Louise Heavens)