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Oil down $3 on demand concerns, US inventory build

NEW YORK - Oil prices fell on Wednesday as concerns about the impact of the global financial crisis on demand and rising U.S. inventories outweighed a move by central banks to cut interest rates.

U.S. crude fell $2.86 to $87.20 a barrel by 12:27 p.m. EDT (1627 GMT), after hitting a fresh 10-month low earlier. London Brent crude fell by $2.40 to $82.26 a barrel.

"We've fallen to a new low for crude prices this year on the latest inventory report and amid the raging credit crisis," said Phil Flynn of Alaron Trading in Chicago.

"In the past, whenever there was a credit crisis, investors bought oil as a hedge. But that has changed now because everybody is realizing that the current credit crisis is weakening economies and that's a big problem that will hurt demand."

U.S. crude stocks rose 8.1 million barrels as inventories recovered from storm disruptions, according to the U.S. Energy Information Administration's weekly report. The rise was much more than the 2.3-million-barrel build forecast by analysts in a Reuters poll.

The EIA report also showed gasoline stocks increased 7.2 million barrels, compared with forecasts for a 1.1 million build, while total demand for products over the past four weeks dropped 8.6 percent compared with a year ago.

Earlier on Wednesday, U.S. crude had fallen to $86.05, its lowest since Dec. 6, 2007, when British government action to prop up its banks failed to reassure financial markets and oil traders anticipated oil demand would fall.

After the U.S. Federal Reserve led a coordinated interest rate cut to shore up the global economy and financial markets rallied, oil briefly rose.

But support from the rate cut was eclipsed by persisting worries about demand, which has fallen in the United States and other developed economies due to the financial market turmoil and high fuel costs.

"The rate cut is supportive for oil, obviously. The question is, is it going to be enough to inspire confidence? You can cut rates to the bone, but if nobody's willing to lend you money, it doesn't really matter," Flynn said.

The U.S. Federal Reserve said it was cutting its key interest rate by half a percentage point to 1.5 percent. Other banks also cutting interest rates included China, which reduced its key rate by 0.27 percentage point.

Surging oil demand in China and elsewhere in Asia played a large part in oil's sustained rally that culminated in a record of $147.27 a barrel in July.

Many analysts had predicted fuel demand in China would remain strong, even if it plummeted in the United States, the world's biggest energy consumer, but concern has mounted that the Chinese economy will not escape global economic turmoil.

Members of the Organization of the Petroleum Exporting Countries were consulting on whether to hold an emergency meeting on Nov. 18, ahead of their next scheduled meeting in December, to discuss the impact of the global financial crisis on the oil market, Libya's top official said on Wednesday.

Some OPEC members have said oil production rate cuts may be needed, if oil prices continue to drop.

Nigeria's oil minister on Wednesday was among the latest to say OPEC might need to reduce output.

"There may be a need to intervene to balance the market, if the price slide seemingly predicted on (lower) demand and over-supply continues," Odein Ajumogobia told Reuters.