Oil Drops as Traders Question the Rally's Sustainability

The comeback rally in oil paused on Wednesday, with Brent crude falling below $60, as traders took stock of the market's blistering 35 percent gain over the past month despite mounting U.S. supplies.

Oil prices were down from open to close, with celebrations for the Chinese Lunar New Year that stretches into the weekend thinning trade volumes in Asia.

The selloff accelerated by afternoon following a fire and explosion at a gasoline processing unit in a refinery owned by Exxon Mobil in Torrance, California, near Los Angeles. Gasoline and heating oil prices saw less losses compared to crude as traders reacted nervously to the incident.

Brent crude fell $2, or 4 percent, its most in two weeks, to settle at $60.53 a barrel. It slid further in post-settlement trade, touching a session low of $59.88 by 3:43 p.m. EST (2043 GMT). Just on Tuesday, Brent had risen to $63, its highest this year, marking a 35 percent gain from a near six-year low of $45.19 set on Jan. 13.

U.S. crude closed down $1.39, or 2.6 percent, at $52.14. It traded below $51.50 post-settlement.

Traders said supply worries have gripped the market again, with industry group American Petroleum Institute expected to estimate a 3 million-barrel build in U.S. crude last week in data due at 4:30 p.m. EST (2130 GMT).

"We have more supply coming from here with the refinery maintenance season in swing, and that's prompting some people at least to ask if the market has overstretched itself with the rebound," said Tariq Zahir, managing member at Tyche Capital Advisors in Laurel Hollow in New York.

Crude stocks rose nearly 5 million barrels in the week ended Feb. 6, taking total U.S. inventories to a record high of nearly 418 million barrels. The next weekly update will be provided by the government on Thursday.

Oil rallied over the past month on extensive short-covering by traders fearing the market had hit bottom following a 60 percent price crash since June. Violence in Iraq and Libya, both important oil producers, added fuel to the rebound.

(By Barani KrishnanAdditional reporting by Robert Gibbons in New York, Jack Stubbs in London and Henning Gloystein in Singapore; Editing by Dale Hudson, David Goodman, Marguerita Choy, Christian Plumb and Andrew Hay)