Oil prices crept lower on Friday, as traders paused after a two-day rally fuelled by concerns over US refiners' ability to meet both summer and winter demand, plus fresh anxiety over the Middle East. London Brent crude for August delivery, the new front-month contract, was down 17 cents at $71.19 a barrel by 0726 GMT, while US July crude eased 12 cents to $67.53 a barrel.
Traders said follow-through buying after Wednesday's weekly oil inventory report that showed surprisingly flat gasoline levels in the United States and falling heating fuel supplies had boosted prices, raising fears refiners would struggle to build up stocks.
"Both markets are very bullish," said Makoto Takeda, assistant manager at Tokyo's Bansei Securities. Heating oil price gains again outpaced crude on Thursday, with the product's premium to crude rising another $1 to its highest close since late 2005, amid fears of a looming struggle to build up enough pre-winter heating fuel inventories.
US gasoline stocks thwarted expectations of a build last week to remain about 6 percent below a year ago following a prolonged stretch of refinery outages, while heating oil inventories slumped to stand one-third below last year.
"Total distillate stocks are relatively ample compared to gasoline, but US refiners are boosting their gasoline yields at the expense of distillates, so this market will follow gasoline higher," Takeda said. Markets were rattled on Thursday after Hamas gunmen seized control of Gaza, prompting Western-backed President Mahmoud Abbas to declare a state of emergency and raising the risk of wider conflict that could draw in nearby producers.
Against a backdrop of potentially tightening oil markets later this year as winter demand rises, some dealers were factoring in a greater geopolitical risk premium. The International Energy Agency (IEA) earlier this month revised up its forecast for 2007 oil demand and called on Opec to pump more crude now to avoid a precipitous decline in stocks that could leave markets short later this year.
But Opec responded on Thursday by saying that current supplies were sufficient and that it saw no need to increase output, although it stood ready to open the taps if necessary to meet growing world demand.
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