Oil Drops Below $97 as Traders Eye U.S. Supplies

Oil prices slipped below $97 a barrel on Tuesday as traders worried that U.S. crude supplies will continue to rise because of weak demand.

Benchmark crude for March delivery fell 61 cents at $96.30 a barrel by late morning European time in electronic trading on the New York Mercantile Exchange. The contract fell 93 cents to settle at $96.91 on Monday.

Brent crude rose 33 cents to $116.26 a barrel on the ICE Futures Exchange in London.

Crude inventories likely rose about 2.3 million barrels last week, according to analysts surveyed by Platts, the energy information arm of McGraw-Hill Cos. The American Petroleum Institute announces its weekly supply data later Tuesday while the Energy Department's Energy Information Administration reports its figures Wednesday.

Crude supplies in the U.S. have increased for the past three weeks at a key Cushing, Oklahoma delivery point amid a mild U.S. winter.

"There's plenty of supply for light, sweet crude oil, and there's no real demand for gasoline right now," energy consultant Cameron Hanover said in a report. "It's cold enough to keep people inside, but it is not cold enough for them to be burning much oil or gas to stay warm."

Investors are also closely watching rising tensions between Western powers and Iran, the world's third-largest crude exporter. The U.S. imposed new sanctions Monday that are designed to make it more difficult for Iran to sell its oil through traditional banking routes and help dissuade the Middle Eastern nation from developing its nuclear program.

European nations plan to stop buying Iranian oil by summer while Iran has threatened to block oil tanker shipments in the Persian Gulf if the embargo is implemented. The U.S. and Israel have said they will not allow Iran to build nuclear weapons.

"If Israel were to strike Iran in an attempt to slow its nuclear program, energy prices would most likely spike in excess of $150 per barrel," Richard Soultanian of NUS Consulting said. "We expect the markets will suffer bouts of extreme volatility in the coming weeks being largely driven by news headlines."

In other energy trading, heating oil was up 1.8 cents at $3.19 per gallon and gasoline futures rose 0.4 cents to $2.93 per gallon. Natural gas added 1.7 cent to $2.57 per 1,000 cubic feet.