Oil steady in Asia after sharp drop

Oil prices steadied in Asia Thursday after falling sharply in the previous session on a report that showed U.S. stockpiles of oil and fuel were larger than expected.

Light, sweet crude for August delivery was down 20 cents to $134.35 a barrel in electronic trading on the New York Mercantile Exchange by midday in Singapore.

Wednesday's inventory report was taken as evidence that soaring gasoline prices have crimped demand in the U.S., the world's biggest energy consumer. Crude oil stocks rose slightly last week, the U.S. Energy Department's Energy Information Administration said. Analysts surveyed by research firm Platts had forecast a 1.7 million barrel decline.

Gasoline supplies fell less than expected, and inventories of distillates, which include diesel fuel and heating oil, rose much more than expected.

The U.S. Federal Reserve, meanwhile, held a key interest rate steady Wednesday, ending its string of consecutive rate cuts. The move was expected, and as a consequence, oil futures changed little from where they were trading before the announcement.

Some economists interpreted Fed comments that accompanied the announcement as suggesting there won't be interest rate increases until late in the year.

Interest rates affect the dollar, and the Fed's campaign of rate cuts, which began in September, has sent the greenback into a protracted decline against the euro. Many analysts believe this slide is a big part of the reason oil prices have nearly doubled over the past year.

Many investors buy commodities such as oil as a hedge against inflation when the dollar weakens. Also, a weaker dollar makes oil cheaper to investors dealing in other currencies, such as the euro.

While oil investors moved quickly past the Fed announcement, they were clearly worried by the EIA demand figures. The energy market has grown increasingly sensitive to evidence of falling demand. Data suggesting gasoline consumption is falling emerges almost daily in reports from the Energy and Transportation departments, the International Energy Agency and private surveys.

A MasterCard report released Tuesday said U.S. demand for gasoline fell 2.7 percent last week compared to the same week last year, and is off by an average of 3.6 percent over the last four weeks compared to the same period in 2007.

The weekly inventory report tends to trigger volatile trading in oil futures, especially since prices have risen to records near $140 a barrel.

Prices were also influenced Wednesday by a separate EIA report that predicted oil production will increase in Azerbaijan, Brazil, Canada, Kazakhstan and the United States in coming years, pulling oil prices down to around $70 a barrel by 2015.

In other Nymex trading, July gasoline futures rose 1.09 cents to $3.405 a gallon, while July heating oil futures rose 1.09 cents to $3.7601 a gallon. July natural gas futures fell 6.2 cents to settle at $12.691 per 1,000 cubic feet.

Brent crude futures fell 29 cents to $134.04 a barrel on the ICE Futures exchange in London.