April 1 (Bloomberg) -- Crude oil in New York fell for a second day on expectations that U.S. inventories will be adequate to meet demand from refiners making gasoline.

Supplies rose 2 percent to 294.3 million in the week ended March 26, the highest since August 2002, the Energy Department said yesterday. The report was released after the Organization of Petroleum Exporting Countries agreed to proceed with a cut in production targets of 1 million barrels a day. OPEC has yet to fully implement reductions made in September and February.

``We're still coming to grips with yesterday's build in supply,'' said Phil Flynn, senior energy trader for Alaron Trading Corp. in Chicago. ``Crude oil stocks are in better shape than they have been in a long time.''

Crude oil for May delivery was down $1.51, or 4.2 percent, at $34.25 a barrel at 2:10 p.m. on the New York Mercantile Exchange. Prices were up 15 percent from a year earlier when U.S. forces were attacking Iraq's Republican Guard defending Baghdad.

In London, the May Brent crude-oil futures contract was up 4 cents at $31.55 a barrel on the International Petroleum Exchange. London and New York markets usually close at the same time. The U.K. switched to daylight-savings time last weekend, a week ahead of the U.S., which has resulted in London markets closing an hour before New York.

U.S. stockpiles were 4.9 percent higher than a year earlier after the 5.7 million barrel increase, the department's figures show. Gasoline supplies rose 1.4 million barrels last week to 200.9 million barrels, the first increase in six weeks.

Refinery Operations

Refineries operated at 88.7 percent of capacity last week, up 0.8 percentage point from the week before. Refiners boost operations during the spring to meet peak gasoline demand during the summer driving season.

``Gasoline is the leader right now,'' said Peter Beutel, president of Cameron Hanover Inc., a New Canaan, Connecticut, energy consultant. ``Refiners are coming back with a sense of urgency.''

Oil prices at current levels through the end of this year will cut world economic growth by about half a percentage point, according to the preliminary findings of a study by the International Energy Agency. The agency advises 26 oil-consuming countries.

The study, which is being conducted jointly with the International Monetary Fund and Organization for Economic Cooperation and Development, was based on New York oil prices of around $35 a barrel.

Saudi Position

``Since we reduced production in OPEC, the price went down,'' the foreign minister, Prince Saud al-Faisal, said in Vienna today. ``This reflects the veracity of the position that Saudi Arabia has taken, that there is an excess capacity on the market, rather than a shortage.''

Saudi Arabia, the world's biggest exporter of crude oil, is OPEC's most influential member.

OPEC officially aims to keep its so-called basket price between $22 and $28 a barrel. Prices have been above $28 a barrel since Dec. 1. The group's benchmark price is based on seven crude- oil grades.

``We think the price will continue to go down until it reaches the range,'' al-Faisal said.

Nigeria joined Venezuela in suggesting OPEC consider raising its official price target by as much as $3 a barrel to make up for the weakening of the dollar. OPEC members have said the dollar's drop against the euro in the past year justifies prices at the upper end of the group's target range because it hurts oil exporters' purchasing power.

Implementation

Nigeria's share of the output reduction won't be implemented yet, in part because of differences among members on whether to proceed, the country's presidential adviser on oil, Edmund Daukoru, said.

``Because of this divergence of opinion, no member was really seriously expected to have already started implementing,'' Daukoru said. ``To further implement the April 1 cut will mean that the impact will be felt in May, probably June.''

The 10 OPEC members with quotas are likely to produce 25.7 million barrels a day this month, little changed from February and 1.2 million barrels a day above the group's current self- imposed quota, according to Geneva-based consultant PetroLogistics Ltd.

``The OPEC meeting was smoke and mirrors more than anything else,'' said Nauman Barakat, senior vice president at Refco Energy Markets in New York. ``There were no additional cuts announced and compliance is so poor. The bearish crude-oil and gasoline numbers were the icing on the cake.''

OPEC is scheduled to meet in Beirut on June 3 to review policy before the third quarter.

U.S. Response

The producer group should reconsider the quota cuts because they will lead to higher gasoline costs and impose a ``tax'' on U.S. consumers, Treasury Secretary John Snow said.

``Higher gas prices, energy prices, act like a tax on American consumers and businesses,'' Snow told reporters in Albuquerque, New Mexico. ``I'm hopeful OPEC will reconsider their actions and the higher gas prices will not come about.''

Gasoline for April delivery was down 5.8 cents, or 5.1 percent, at $1.077 a gallon in New York. Prices were 18 percent higher than a year earlier. Retail gasoline prices have declined by 2 cents from a record $1.753 a gallon on Tuesday, according to the AAA, formerly the American Automobile Association.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net.

Last Updated: April 1, 2004 14:12 EST