Oil falls to $77 as 3-week rally stalls

By NATALIYA VASILYEVA AP Business Writer

MOSCOW (AP) - Oil prices dropped to $77 a barrel Thursday as investors lost confidence in a three-week rally amid signs of weak crude demand in the U.S., the world's biggest energy consumer.

Benchmark crude for July delivery was down 26 cents to $77.41 a barrel Thursday morning in London in electronic trading on the New York Mercantile Exchange. The contract rose 73 cents to settle at $77.67 on Wednesday.

Stock markets provided little direction, with Britain's FTSE 100 up 0.9 percent but Japan's Nikkei 225 stock average down 0.7 percent. The Dow Jones industrials closed flat on Wednesday.

Oil has jumped from $64 on May 25 - after dropping from $87 earlier last month - as fears eased that Europe's debt crisis will stall global economic growth.

Recent movements in oil prices got experts saying that traders are now looking less at the fundamental factors but are getting carried away by emotional trading.

"At $77 a barrel, oil prices have proved robust in the face of mixed U.S. economic data and rather negative U.S. inventory data for prices overall. The current price trend shows that oil prices appear to have already decoupled themselves from the fundamentals again," Commerzbank said in a morning note.

Investors are still eyeing clues about U.S. oil demand in crude inventory data, which had shown signs of improving recently but unexpectedly rose last week, the Energy Department's Energy Information Administration said Wednesday.

Some analysts don't expect the massive BP oil spill in the Gulf of Mexico to squeeze supplies anytime soon.

The U.S. government began a six-month moratorium on new deepwater exploration drilling in Gulf of Mexico and Pacific regions on May 28 in response to the spill.

"While environmentally catastrophic, the amounts of oil involved are too small to materially alter global supply-demand balances in the near-term," Bank of America Merrill Lynch said in a report.

Crude production in the Gulf of Mexico accounts for 1.9 percent of overall global oil output of 86 million barrels per day, the bank said.

In other Nymex trading in July contracts, heating oil rose 0.2 cent to $2.1343 a gallon and gasoline added 0.16 cent to $2.1609 a gallon. Natural gas was up 8.2 cents at $5.060 per 1,000 cubic feet.

Brent crude was up 63 cents to $78.76 a barrel on the ICE futures exchange.

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Associated Press Writer Alex Kennedy contributed to this report from Singapore.