* U.S. crude oil, gasoline, distillate stocks rise
* Weak U.S. economic outlook stirs demand growth fears
* U.S. to send envoy to Iran talks in policy shift
* Petrobras says oil worker strike not hitting output
(Updates prices with settlements)
By Richard Valdmanis
NEW YORK, July 16 (Reuters) - Crude oil prices dropped
sharply for a second day on Wednesday after a U.S. government
report showed a surprise increase in inventories and continued
weak demand in the world's top consumer nation.
The decline in prices, which marked the biggest two-day
loss in percentage terms since January 2007, helped stocks on
Wall Street regain some of the ground lost in recent days on
fears over the health of the U.S. banking sector.
U.S. crude futures <CLc1> fell $4.14 to settle at $134.60 a
barrel, adding to Tuesday's drop of $6.44 and bringing oil
close to $13 below last week's all-time peak. London Brent
crude <LCOc1> fell $2.56 to $136.19 a barrel.
Wednesday's losses came after the U.S. Energy Information
Administration reported crude inventories rose by 3.0 million
barrels last week -- countering expectations for a decline --
alongside builds in gasoline and distillate stocks.
"The EIA builds across the board are the most bearish
inventory data we've seen in a long while," said John Kilduff,
senior vice president of MF Global in New York.
The widely watched government report also showed U.S. oil
products demand running 2.0 percent below year-ago levels,
another sign that soaring prices are cutting into consumer
demand for fuel.
Adding to pressure on oil prices, a senior U.S. official
said Tuesday the United States was planning to send an envoy to
talks this weekend between Iran and major powers over Tehran's
nuclear program.
Washington had said previously it would not be involved in
any pre-negotiations with Iran unless it gave up nuclear
enrichment, and the tensions between the OPEC-member and the
West have helped drive up crude oil prices.
Investors have pumped cash into oil and other commodities
this year, looking to hedge against inflation and the weak
dollar, which has contributed to a 50 percent oil price rally
this year to a record above $147 a barrel this month.
Saudi Arabia, the world's top oil exporter, wants to see
lower oil prices, Saudi King Abdullah said in an interview with
an Italian newspaper.
"When the price of oil hovered around $100 a barrel, we
were already unhappy. Imagine what we feel now, when there is
talk of $200," he said.
Oil's six-year rally has also been driven partly by
ballooning demand from developing economies such as China and
India.
An oil worker strike in Brazil this week was not
significantly affecting oil production levels, Brazil's state
oil company Petrobras said Tuesday.
(Additional reporting by Jane Merriman in London and Luke
Pachymuthu in Singapore; Editing by Christian Wiessner)
