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oil slips ahead of inventory report Oil slips ahead of inventory report
Back near $71 as gasoline supplies expected to gain fourth week in a row; Iranian talks offer hope of diplomatic solution.
May 24, 2006: 6:17 AM EDT


SYDNEY (Reuters) - Oil prices lost steam Wednesday ahead of weekly U.S. inventory data and an international meeting on Iran's nuclear program, falling back towards $71 and giving up some of Tuesday's commodity-driven rally.

U.S. July crude lost 41 cents to $71.35 a barrel in early electronic, after rebounding 2.6 percent Tuesday in tandem with a spectacular bounce for base metals and forecasts of a heavy hurricane season in the Gulf of Mexico.

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London July Brent crude fell 23 cents to $70.77.

"With most polls forecasting an increase in U.S. gasoline stocks, that's what is on radar screens today," said Gerard Burg, energy economist at the National Australia Bank in Melbourne.

"Then there is the London meeting on Iran, although I wouldn't bet my house on any resolution there," he said.

A Reuters poll sees a fourth weekly rise for U.S. gasoline inventories, with 17 analysts forecasting an average build of 1.2 million barrels last week, when government data is released later Wednesday.

Analysts say refineries were cranking up output ahead of the Memorial Day holiday on May 29, the traditional launch of the U.S. summer, and in time for drivers taking to the roads.

Elsewhere, analysts expected some reduction in demand growth when China, the world's second-largest oil consumer, increases state-capped retail gasoline and diesel prices Wednesday, taking them 15 percent higher so far this year.

Diplomatic pressure
World powers meet in London Wednesday to discuss a package of incentives and threats drafted by European countries aimed at defusing a crisis over Iran's nuclear programme. Iran is the fourth-biggest oil exporter.

Senior officials from U.N. Security Council permanent members plus Germany will try to narrow divisions over how persuade Tehran to halt its uranium enrichment work, with President Bush advocating further diplomatic pressure Tuesday.

Washington, which has not ruled out the use of force, suspects Iran's nuclear program is a cover for efforts to develop an atomic bomb. But the Islamic Republic says it is developing nuclear technology for civilian power generation.

Expectations of rising stocks and hope for progress on Iran took the heat out of Tuesday's price surge as commodities rebounded from last week's inflation-inspired selloff. Gains were also driven by U.S. government hurricane season forecasts.

"To some extent predictions for a stormy summer in the Gulf of Mexico were already out there," said National Australia Bank's Burg. "It adds risk later down the road but was probably not going to support higher prices in the short-term."

The U.S. National Oceanic and Atmospheric Administration said there could be up to 10 hurricanes this year, even as the Gulf continues to recover from 2005 storms, with 20 percent of crude oil and 13 percent of natural gas production still out of action.

U.S. Energy Secretary Sam Bodman told Reuters Tuesday that as much as 10 percent of the Gulf's production may never return.

Despite falling Wednesday forward crude oil contracts for August and September delivery, the height of hurricane season, are currently trading above $72 a barrel while contracts from October to the end of the year are above $73.

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