Oil Falls for Second Day on Expectation of U.S. Inventory Build

By Christian Schmollinger

May 13 (Bloomberg) -- Oil fell in New York for a second day

on expectations that U.S. crude supplies probably gained for a
fourth week on falling demand in the world's largest consumer.
Crude supplies likely advanced by 2.5 million barrels to
325.6 million barrels in the week ended May 9, according to the
median of responses in a Bloomberg News survey. Gasoline and
distillate inventories are also expected to build. Indonesia and
Malaysia are considering reducing fuel subsidies as the cost of
maintaining them have risen as oil has climbed to a record.
``A build would be looked at as bearish especially on the
distillate side since the drawdown last week raised all the
concerns about tightness,'' said Victor Shum, senior principal
at Purvin & Gertz Inc. in Singapore. ``If more of the countries
in Asia raise fuel product prices, reducing subsidies, then we
may see demand in emerging markets slow down.''
Crude oil for June delivery fell as much as 97 cents, or
0.8 percent, to $123.26 a barrel in after-hours electronic
trading on the New York Mercantile Exchange. It was at $123.32
at 12:03 p.m. Singapore time.

Yesterday, futures dropped $1.73, or 1.4 percent, to settle

at $124.23 a barrel, after earlier rising to $126.40, the
highest since trading began in 1983.

Oil has surged 12 percent since May 1 to reach the record
high, prompting concerns the price had climbed too far, too fast.
Crude prices are more than double what they were last year.

Brent crude oil for June settlement fell 71 cents, or 0.6
percent, to $122.20 a barrel on London's ICE Futures Europe
exchange at 11:53 a.m. Singapore time. The contract fell $2.49,
or 2 percent, to $122.91 a barrel yesterday. It touched a record
$125.90 on May 9.

Curve Flattens

There are signs that oil's rally may be slowing down as the

premiums between the first and second month Nymex futures have
narrowed. The June contract is now only 16 cents higher than
July, versus 50 cents a week ago and 81 cents on April 29.
June's price difference to December has closed up to $1.60 a
barrel against $3.18 a barrel on May 6.

Brent futures became cheaper closest to delivery for the
first time in about three months on May 9. The July contract is
now at a 37 premium to June against a 27 cent discount on May 6.

``This shows that there is plenty of crude,'' said Purvin &
Gertz's Shum. ``And if the inventory report shows builds across
the board that may further fuel the profit-taking activity.''

Gasoline inventories probably climbed 550,000 barrels from
211.9 million barrels, according to the analysts. Supplies of
distillate fuel, including diesel and heating oil, probably rose
1 million barrels from 105.7 million. All the analysts projected
a gain.

China Earthquake

China's strongest earthquake in 58 years may cut the
nation's energy demand as damaged power plants and transmission
lines force companies to idle generators.

About 5.5 gigawatts, almost 1 percent of the nation's
generation capacity, were idled in the provinces of Shaanxi and
Sichuan after yesterday's 7.9-magnitude earthquake, according to
a report by the official Xinhua News Agency, citing data from
State Grid Corp. of China. Sichuan, where the quake was focused,
lost 4 gigawatts of capacity.

China's oil imports, the third-highest in the world, fell
for the first time in 18 months in April as record crude prices
discouraged refiners from purchasing oil to turn into fuel for
sale at less than cost.

The earthquake, which killed almost 10,000 people, had its
epicenter 90 kilometers (56 miles) from the central city of
Chengdu, the capital of Sichuan province. State Grid Corp., the
nation's largest electricity distributor, said today it doesn't
expect further reports of major damage to the grid.

To contact the reporter on this story:
Christian Schmollinger in Singapore at
Christian.s@bloomberg.net.