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Oil falls below $78 ahead of U S data

UScrude, which closed at a record $78.21 the previous session, was down 51 cents at $77.70 a barrel by 1100 GMT. It has been testing last year’s all-time high of $78.40.

London Brent slipped 54 cents to $76.51.

Oil was influenced by a steep fall in world stock markets, rattled by mounting casualties from a global credit crunch.

A U.S. mortgage lender warned it may have to liquidate its assets, while Wall Street firm Bear Stearns halted redemptions on a hedge fund invested in risky credit securities. Australia’s Macquarie Bank also warned of big losses in two debt funds.

But Goldman Sachs analysts said the fall-out for oil and other commodities would be limited.

“Physical fundamentals, not financial flows, are the main determinant of commodity prices. Inventories in many markets are low (e.g. base metals) or declining (e.g. crude oil) while physical demand is firm,” the bank wrote in a report.

“Further... investors are unlikely to be in both the subprime and commodities space in significant size, and thus an investor in subprime assets looking for cash would be unlikely to have large commodity investments to sell, which reduces the likelihood of contagion.”

Analysts and investors say OPEC’s reluctance to lift oil production will lead to a sharp pre-winter decline in supplies.

The latest weekly snapshot of U.S. crude and fuel stocks is due at 1430 GMT.

Crude oil stocks were expected to have fallen by 0.7 million barrels last week, their fourth consecutive decline, as refiners boosted operating rates, according to a Reuters poll of analysts.

Distillate inventories were seen increasing by 1.4 million barrels and gasoline supplies rose by 500,000, their second build in a row, although gasoline stocks remain below seasonal norms heading into the final month of the peak summer demand period.

With part of the market’s latest rally attributed to a fresh infusion of short-term speculative funds, some analysts said a correction could be in store after new highs are set.

“Oil is strong technically,” said Makoto Takeda of Tokyo’s Bansei Securities. “After today’s data the market is likely at first to rise further, but a pullback is likely later. I think there’s a risk that the fresh buying is running dry.”