Oil prices slip as robust supply outweighs Fed cut

By Erwin Seba

HOUSTON (Reuters) -Oil prices dropped on Friday as worries about large supplies and declining demand outweighed expectations that the year's first interest-rate cut by the U.S. Federal Reserve would trigger more consumption. 

Brent crude futures were down 71 cents, or 1.05%, at $66.73 a barrel by 12:53 p.m. CDT (1753 GMT), while U.S. West Texas Intermediate futures also fell by 71 cents, or 1.12%, to $62.86.

Both benchmarks were still on track for a second consecutive weekly gain.

"Oil supplies continue to remain robust and OPEC is reducing its oil production cuts," said Andrew Lipow, president of Lipow Oil Associates. "We haven't seen an impact on Russian crude oil exports" from sanctions.

The Fed cut its policy rate by a quarter of a percentage point on Wednesday and indicated that more cuts would follow as it responded to signs of weakness in the U.S. jobs market. 

Lower borrowing costs typically boost demand for oil and push prices higher. 

John Kilduff, partner with Again Capital, said future Fed rate cuts of a quarter of a percentage point would likely not boost oil markets because it would further weaken the dollar, making oil more expensive to buy.

"The Fed will have to be more aggressive than they have been," Kilduff said. "We need a 50 (basis-point increase) to boost demand. The Fed's action is not translating to growth for the crude market due to underlying market fundamentals."

On the demand side, all energy agencies, including the U.S. Energy Information Administration, have signaled concern about weakening demand, tempering expectations of significant near-term price upside, said Priyanka Sachdeva, an analyst at Phillip Nova. 

Lipow also saw effects on the demand side.

"The refinery turnaround season will further reduce demand," he said.

Refineries shut production units in the spring and fall for overhauls, called turnarounds. 

A higher-than-expected increase of 4 million barrels to U.S. distillate stockpiles raised worries over demand in the world's top oil consumer and pressured prices. [EIA/S]

The latest economic data added to concerns, with the U.S. jobs market softening while single-family homebuilding plunged to a multi-year low in August, discouraged by a glut of unsold new houses. 

One factor holding back oil prices is an uneven economic recovery, particularly in the U.S., said PVM Oil Associates analyst Tamas Varga.

"The corporate sector is benefiting from ongoing deregulation, whereas consumers are beginning to feel the strain of import tariffs, with both the labor and housing markets showing signs of weakness," he said.

(Reporting by Erwin Seba in Houston, Stephanie Kelly in London; Additional reporting by Sudarshan Varadhan; Editing by Jan Harvey, David Gregorio and Leslie Adler)