Oil prices fell on Thursday as a sharp drop in the U.S. stock market spurred concerns about crude demand growth, reversing an earlier rally.
U.S. oil -- which earlier in the day rose more than $1 to trade at a premium to London Brent crude -- was down at $74.81. Brent crude was also lower.
All three major Wall Street stock indexes were down at least 2 percent as stocks sold off amid the rise in oil prices and signs of more deterioration in the U.S. housing market.
"The (oil) market was forced to take a look at the stock market, and they're seeing a 300-point drop, which is maybe not so good for petroleum demand," said Jim Ritterbusch of Ritterbusch and Associates of Galena, Illinois.
U.S. crude, which has not closed above Brent since February, surged to $77.24 a barrel earlier Thursday, while the London contract peaked at $77.16, following a crude inventory decline in the United States, the world's top oil consumer.
Weekly U.S. government inventory data released Wednesday showed a third straight week of U.S. crude stock declines, including a drop of 1.4 million barrels at the key Cushing, Oklahoma, delivery point for the U.S. West Texas Intermediate futures contract.
A glut of crude at the Cushing storage hub has kept the U.S. benchmark at an atypical discount to North Sea benchmark Brent. But Cushing stocks have fallen for nine straight weeks and are around a quarter lower than their April peak, when Brent was trading at a record premium to WTI of around $6 a barrel.
Oil output curbs by the Organization of Petroleum Exporting Countries would ensure a continuing decline in U.S. crude stocks through the third quarter, experts said. "As we move deeper into the third quarter, reductions in OPEC supplies initiated in late 2006 will help to reduce U.S. surplus crude supplies," BNP Paribas said.
"If the current OPEC output trend continues, the cartel will remove on average in excess of 1 million bpd of supply, versus last year in the third quarter, supporting a stronger than seasonal draw in U.S. inventories (albeit from elevated levels)."
Other analysts pointed to the emergency shutdown of most of Exxon Mobil's 326,000 bpd Fawley refinery, which accounts for almost a fifth of Britain's refining capacity, as a factor behind Brent's lagging performance.
While bullish for gasoline and heating oil, the closure could be bearish for North Sea crude, if the plant stops processing for a prolonged period. Exxon said on Thursday it planned to restart operations over the next several days.