Tue Jul 13, 2004

SINGAPORE (Reuters) - U.S. oil prices fell for the third day in a row on Tuesday but remained close to the $40 mark on lingering fears that any glitch in the production chain could cause a major disruption to world supplies.

U.S. light crude (CLc1: Quote, Profile, Research) dropped 25 cents to $39.25 a barrel, bringing losses in the last three days to a little over $1. London's IPE Brent crude for August was 23 cents down at $36.40 a barrel.

U.S. crude ended lower on Monday despite shooting to a five-week high at $40.75 after a fire at a major gasoline-exporting refinery in Europe propelled U.S. gasoline futures to the highest levels since the end of May.

Tony Nunan, manager at Mitsubishi Corp.'s international petroleum business in Tokyo, said Monday's roller coaster market reflected the sensitivity of oil prices to upside risk.

Strong global oil demand and sparse spare capacity has left little room to cope with any supply disruptions.

"Short-term, the market looks well supplied but it's hard to go short in the market and even if prices go down I think there'll be a floor at $35," Nunan said.

"We're not out of the woods yet on gasoline in the United States and we're now in pre-season buying for heating oil," said Nunan.

Gasoline consumption peaks in the United States during summer vacation season, while heating oil is the main fuel used in winter months.

Analysts expect this week's U.S. fuel supply data to show a small rise in stockpiles. Weekly figures released each Wednesday by the Energy Information Administration (EIA) are used by the industry as a snapshot for the supply/demand balance in the world's biggest consumer.

A Reuters survey of seven analysts predicted U.S. crude inventories to rise 1.4 million barrels in the week to July 7. The analysts forecast gasoline supplies to go up by 500,000 barrels and for distillates to increase by 2.1 million barrels.

Only Saudi Arabia, the world's biggest exporter, has any significant spare production capacity with the other OPEC producers pumping flat out and Iraq's output recovering from war damage.

The Organization of the Petroleum Exporting Countries is expected to raise official production limits by 500,000 barrels a day (bpd) from August 1, but the increase will have little impact on actual supplies as OPEC is already supplying way over the output ceiling.

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