Oil pares losses as U.S. stock build less than feared

NEW YORK (Reuters) - Oil prices fell on Thursday after the U.S. government reported record high crude inventories, but the market still came off its lows as weekly stock builds turned out to be less than feared.

U.S. commercial crude oil inventories rose 7.7 million to a record 425.6 million barrels last week, the sixth straight week levels reached seasonal record highs, the Energy Information Administration (EIA) said. [EIA/S]

The build was more than double the 3.2 million barrels expected by analysts in a Reuters poll, but way below the 14.3 million barrels estimated by industry group American Petroleum Institute (API) late Wednesday. [API/S]

Benchmark Brent and U.S. crude futures, which fell about 5 percent on Wednesday after release of the API numbers, came off their session lows on the EIA data.

"It is still a bearish number though it provides a little bit of a relief rally if you'd been going with the API estimate," Tariq Zahir, managing member at New York's Tyche Capital Advisors said, explaining why the market pared losses.

Zahir said he expected prices to remain under pressure though. "Builds are probably going to be even higher next week from refinery outages for maintenance."

Brent was down 85 cents at $59.68 a barrel by 12:40 p.m. EST, after falling as low as $57.80. On Tuesday, it had hit a two-month high of $63.

U.S. crude slipped $1.35 to $50.79, off the session low of $49.15.

Oil has rallied over the past month, with Brent gaining 35 percent from a mid-January low on short-covering by traders fearing the market had hit bottom after a 60 percent crash since June on fears of a supply glut. Violence in Iraq and Libya, both important oil producers, added to the rebound.

While supply worries seemed to have gripped the market again, the falling U.S. oil drilling rig count could balance those concerns.

Since late January, crude prices have tended to retreat after the EIA reported inventory builds and then rally by the end of the week on rig-count data from industry firm Baker Hughes. The number of U.S. rigs drilling for oil were already at three-year lows, according to Baker Hughes data from the past two Fridays.

"Tomorrow we could see a recovery in expectation of another sharp drop in the rig count," said Carsten Fritsch, oil analyst at Commerzbank in Frankfurt.

"The focus is again back on the oversupply -- the big question is for how long?"

(This version of the story removes an erroneous reference in second paragraph to weekly build being the largest on record.)

(Additional reporting by Claire Milhench in London, Osamu Tsukimori in Tokyo and Henning Gloystein in Singapore; Editing by Dale Hudson, William Hardy, Ruth Pitchford and Marguerita Choy)

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