Oil falls to near $82 on weak U.S. crude demand

Oil prices fell slightly from a three-month high above $82 a barrel Wednesday after a report showed U.S. crude inventories fell less than expected last week, suggesting demand remains sluggish in the world's largest economy.

By early afternoon in Europe, benchmark crude for September delivery was down 29 cents to $82.26 a barrel in electronic trading on the New York Mercantile Exchange. The contract gained $1.21 to settle at $82.55 on Tuesday, the highest since May 4.

U.S. crude inventories fell by 776,000 barrels last week, according to the American Petroleum Institute. That was less than the drop of 1.2 million barrels that analysts expected, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Supplies of gasoline and distillates rose, the API said.

The Energy Department's Energy Information Administration is scheduled to report its inventory data -- the market benchmark -- on Wednesday.

Analysts point to surging oil demand in developing economies, especially China, as more than offsetting weaker consumption in the U.S. and Europe.

"The underlying fact is the emerging markets are still growing and so is their consumption of energy," Sander Capital said in a report.

Oil broke above $80 this week as the euro rose to a three-month high against the dollar. The euro fell to $1.3192 on Wednesday from $1.3222 on Tuesday while the dollar fell to an eight-month low of 85.49 yen from 85.80 yen.

"The path of the dollar -- especially versus the yen -- and the risk of weakness in the U.S. economy are expected to remain major influences this week," said a report from Sucden Financial in London. "Economic events -- including rate announcements Thursday and employment data Friday -- will all be watched closely to help assess oil demand and help determine if there is a new price range for oil."

If oil prices continue to rally, it could undermine consumer demand in the U.S. and jeopardize the fragile economic recovery. Oil soared to $147 a barrel in July 2008 before plummeting to $32 in December amid a global financial crisis and recession.

"The scary thought is what happens if oil hits $86 and keeps going," Sander Capital said. "The U.S. economy cannot take oil at $100 a barrel again.

In other Nymex trading in September contracts, heating oil fell 0.45 cent to $2.1955 a gallon, gasoline skidded 0.51 cent to $2.1884 a gallon and natural gas rose 3.9 cents to 4.678 per 1,000 cubic feet.

In London, Brent crude was down 52 cents to $82.16 a barrel on the ICE Futures exchange.