Oil prices fall even after inventory drops

NEW YORK -- Oil prices fell in jittery trading Wednesday, as the strengthening dollar and signs of a slowing economy outweighed inventory drops and OPEC's cutback of excess production.

The Energy Department's Energy Information Administration said that crude inventories fell by 5.9 million barrels last week compared to the previous week, and that gasoline inventories fell by 6.5 million barrels. The EIA also reported, however, that inventories of distillates -- which include heating oil and diesel fuel -- fell by a lower-than-anticipated 1.2 million barrels.

Refineries were running at a low 78.3 percent of their capacity last week, the report said.

"It's being seen as somewhat aberrant because of the storms," said John Kilduff, senior vice president of risk management at MF Global LLC. "But I don't think you can ignore this data."

Light, sweet crude for October delivery fell $1.11 to $102.15 a barrel in late morning trading on the New York Mercantile Exchange, after initially jumping on the EIA's report. The contract fell by more than $3 a barrel in the previous session to the lowest close since April 1.

In London, October Brent crude fell $1.41 to $98.93 a barrel on the ICE Futures exchange

The supply readings came after OPEC said it would reduce output by 520,000 barrels a day.

The Organization of Petroleum Exporting Countries, however, decided not to take the more dramatic step of slashing its production target. The move was viewed as a compromise meant to avoid a backlash from the biggest petroleum consuming nations and stop the rapid decline in oil prices.

A number of analysts said they did not expect OPEC's output decision to spark a sustained rally in oil prices, as investors remain concerned over slowing economic growth in the U.S, Europe and Japan.

"All they're saying is, 'We've been cheating for the past year.' ... I don't think the market's going to take it that seriously," analyst and trader Stephen Schork said by phone from Vienna. "I think the general mood is we are heading lower."

The EIA report showed that demand for gasoline, distillate fuel and jet fuel over the past four weeks was below year-ago levels.

"You just can't fight the weight of the market right now," said Darin Newsom, senior analyst at DTN in Omaha, Nebraska. "I still think we're going to drop below $100."

The U.S. dollar rose against the euro, pound and yen, encouraging investors who used commodities to hedge against a weakening dollar to unwind those bets.

Early Wednesday, Ike was about 95 miles west of Havana, Cuba, moving west-northwest at 10 mph with sustained winds near 75 mph. It was expected to cross the Gulf of Mexico, strengthening to a Category 3 with winds of up to 130 mph.

Forecasters said that it could hit on Saturday morning about anywhere along the Texas coast, with the most likely spot close to Corpus Christi.

The U.S. Department of the Interior's Minerals Management Service said that as of Tuesday, about 77.5 percent of oil production and about 64.8 percent of natural gas production in the Gulf remained shuttered as Hurricane Ike approaches Texas. Oil and gas operators have been working to restore production since they prepared for Hurricane Gustav nearly two weeks ago.

In other Nymex trading, heating oil futures fell 1.23 cents to $2.8888 a gallon, while gasoline prices gained 01 cents to $2.6424 a gallon. Natural gas for October delivery fell 8.5 cents to $7.450 per 1,000 cubic feet.

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