Oil drops $1 on U.S. stockbuild, Greece; WTI hits 6-month low

SINGAPORE (Reuters) : Oil fell more than $1 on Wednesday, with the U.S. benchmark dropping to a more than 6-month low, as a larger-than-expected rise in crude stocks in the United States and fears of Greece’s exit from the euro zone muddied the outlook for demand growth.

Investors are worried about the demand for oil as a prolonged political crisis in Greece may push Europe into a deeper financial mess at a time when China is slowing and the U.S. economy remains fragile. Yet, limited spare capacity and fears of a supply disruption have put a floor under prices. Brent crude slipped $1.39 to as low as $110.85 a barrel by 2:42 a.m. EDT, declining for four out of the past five sessions. U.S. oil fell $1.68 a barrel to $92.30 after earlier slipping to $92.13, the lowest since November 3.

“A further $2-$3 fall is acceptable under current conditions,” said Tetsu Emori, a Tokyo-based commodities fund manager at Astmax Investments. “The market has been under pressure because of weak sentiment. But if you go by supply-demand balance, oil prices are undervalued.”

Oil may recover as the seasonally weak demand period ends and as the U.S. driving season begins, Emori said. He expects supplies to tighten because producer group OPEC and top exporters such as Saudi Arabia have very limited spare capacity as they have already ramped up output to cool prices.

But for now, a steep increase in crude stocks in the world’s top consumer, United States, a slow but steady progress in talks with Iran over the Islamic Republic’s disputed nuclear program and uncertainty surrounding Greece are weighing on prices.

U.S. crude stocks increased nearly four times than what analysts had expected, data from the American Petroleum Institute (API) showed. Crude inventories rose 6.57 million barrels in the week to May 11, outpacing analysts’ expectations of a rise of 1.7 million barrels. <API/S>

The U.S. Energy Information Administration will release its weekly petroleum inventory data at 1430 GMT. <EIA/S>

Adding to worries about demand, Greece abandoned a nine-day hunt for a government and called a new election, pushing it closer to bankruptcy and a euro zone exit.

Iran and the U.N. nuclear watchdog ended two days of talks by agreeing to meet again next week, just two days before Tehran resumes negotiations with world powers concerned it may be seeking to develop atomic bomb capability.

“Certainly, if progress is made in Baghdad, a military option will be even more remote in 2012,” Barclays Capital analysts said in a note, referring to a scheduled meeting between the UN Security Council and Iran next week.

“However, there is a risk that because expectations of a breakthrough have risen, if the negotiations stall or are judged a failure, the calls for military action will mount and Iran will again take center stage as a key upside risk in the oil markets.”

Brent remains neutral above a support at $110.34 per barrel, the May 7 low, while support for U.S. oil lies at $92.79 per barrel, according to Reuters technical analyst Wang Tao.