Oil sinks ahead of U.S. energy report

Crude prices fall towards $58 as traders brace for jump in U.S. crude inventories and formal production cut by OPEC.

October 18 2006: 6:33 AM EDT | LONDON (Reuters) -- Oil slipped towards $58 a barrel on Wednesday as dealers weighed an expected rise in robust U.S. crude stocks against an OPEC meeting likely to seal a deal to cut output.

U.S. light crude for November fell 37 cents to $58.56 a barrel, after declining $1.01 the previous session. London Brent crude fell 35 cents to $60.59.

"The market has its eye on the U.S. oil stocks data... but more importantly, it is also waiting to see if there is going to be something definitive on the production cuts," said U.S.-based analyst Phil Flynn with Alaron Trading.

Ministers from the Organization of the Petroleum Exporting Countries are scheduled to meet in Qatar on Thursday to clear a deal to remove 1 million barrels from daily output in an attempt to stem oil's drop from a high of $78.40 in July.

OPEC's big gamble

But the group has been divided on whether it should cut the output from actual production of roughly 27.5 million barrels per day (bpd) or from its nominal 28 million-bpd ceiling, a disagreement analysts say has hurt OPEC's credibility.

"Everyone is taking a wait-and-see attitude with OPEC," said Olivier Jakob of Petromatrix. "They could have a one million barrel cut on paper, but in reality it could be smaller than that."

Analysts said brimming U.S. crude stock levels, which last week stood almost 7 percent higher than a year ago, were limiting any potential recovery in prices ahead of the winter. Oil hit a 2006-low of $57.22 a barrel last week.

U.S. crude stocks are likely to have risen by 1.3 million barrel last week, while distillate stocks -- including heating oil -- were seen falling by 650,000 barrels, according to a Reuters survey ahead of data due later on Wednesday.

Gasoline stocks were seen falling by 270,000 barrels.

"The stats are going to be a mixed bag with crude stocks higher, but lower for products. It's colder in the states so we will have to see how that affects heating oil demand," Jakob said.

The U.S. winter is likely to be 5 percent colder than last year's mild season, meaning demand for winter fuels could rise, private weather forecaster EarthStat Energy WeatherWinter said on Tuesday.

Shares of oil majors Exxon Mobil (Charts), Chevron (Charts) and ConocoPhillips (Charts) all edged lower in Tuesday trade on the New York Stock Exchange.