LONDON – Oil prices dropped more than $2.50 a barrel Wednesday after U.S. government data showed a large build in domestic crude inventories and President Bush urged construction of new oil refineries.
Light, sweet crude for June delivery fell $2.59 to $51.61 a barrel on the New York Mercantile Exchange (search). Unleaded gas futures plunged 8.32 cents to $1.5419 a gallon, while heating oil futures fell 3.39 cents to $1.474 a gallon.
The Energy Department (search) said Wednesday that the inventories of crude oil in the largest consuming nation grew by 5.5 million barrels last week to 324.4 million barrels, or 9 percent above year ago levels.
Unleaded gasoline supplies shrank by 300,000 barrels to 211.3 million barrels, or 4.6 percent above year ago levels. The inventory of distillate fuel, which includes diesel and jet fuel, fell by 1.4 million barrels to 102.6 million barrels, or 0.4 percent above year ago levels.
Tom Bentz, a broker at BNP Paribas Futures in New York attributed the selloff to shifting sentiment among traders about the U.S. supply of gasoline ahead of the summer.
Last week, concerns about refinery glitches put upward pressure on the entire oil complex.
"But when you really look at it," Bentz said, "inventories are still 5 percent above the historical five-year average. The market may have gotten a little overexcited."
Bentz said prices could be headed below $50 a barrel before too long.
In remarks to small business leaders, Bush urged using closed military bases as sites for new oil refineries. The Energy Department is being ordered to step up discussions with communities near such bases to try to get refineries built.
"We know we have a capacity problem," White House press secretary Scott McClellan said Wednesday.
Prices had been falling since the start of the week, when Bush called on Saudi Arabia's Crown Prince Abdullah to expand production, in a bid to ease U.S. gasoline prices that have shot above $2.20 a gallon.
Analysts say the Bush-Saudi meeting was a signal that both sides recognized that current high prices needed to be addressed, thus sending prices downward.
Saudi Arabia has outlined a plan to increase production capacity to 12.5 million barrels a day by 2009 from the current 11 million limit. Saudi Arabia now pumps about 9.5 million barrels daily. If necessary, Saudi Arabia says it will eventually develop a capacity of 15 million barrels a day.
Global petroleum markets aren't short of crude oil, Iran's oil minister said Tuesday.
"I think the market is oversupplied," Bijan Namdar Zangeneh told reporters during a natural gas conference in Port-of-Spain, Trinidad. "We have no difficulties on the supply side."
Iran is one of 11 member countries of the Organization of Petroleum Exporting Countries (search). Officials from two other OPEC members, Saudi Arabia and the United Arab Emirates, have said a global lack of refining capacity, not a shortage of crude oil, is to blame for an almost 50 percent surge in world prices over the last year.
OPEC President Sheik Ahmed Fahd Al Ahmed Al Sabah, however, said last week that the organization would automatically increase its total output by 500,000 barrels a day in May in response to an expected increase in demand.
Tetsu Emori, chief commodities strategist at Mitsui Bussan Futures, said the Bush meeting with the Saudi prince, and high crude oil inventories has made current market sentiment very bearish.
"If we don't see any supply disruptions, we might even see $45 in the gasoline season," he said.