Oil drops on weak GDP report

COLUMBUS, Ohio -- Oil prices slumped Thursday as the world's largest economy said the economy slowed in the third quarter in what figures to be the clearest sign yet that the U.S. is now in a recession.

Light, sweet crude for December delivery fell $1.91 to $65.59 a barrel on the New York Mercantile Exchange. Oil prices have fallen 55 percent since peaking at $147 a barrel in mid-July.

The broadest barometer of the nation's economic health, the gross domestic product, shrank at a 0.3 percent annual rate in the July-September quarter, the Commerce Department reported Thursday. It marked the worst showing since the economy contracted at a 1.4 percent pace in the third quarter of 2001, when the nation was suffering through its last recession.

The declining GDP number means weak demand for gasoline, analysts said.

"We were smacked with the short-term reality that demand is just not going to be there," said Phil Flynn, an analyst at Alaron Trading Corp.

The deterioration reflected a sharp retrenchment by consumers, whose spending accounts for the largest chunk of national economic activity. Consumers ratcheted back their spending at a 3.1 percent pace in the third quarter, the most since the second quarter of 1980, when the country was in the grip of recession.

"If the consumers are struggling that bad, the outlook for gasoline demand is not that strong," Flynn said.

From toys to medical equipment, petroleum is in everything and the latest GDP report suggest that demand for almost everything, including gasoline, is falling away.

Prices at the pump continued their dramatic decline.

Retail prices fell 4 cents overnight to $2.547 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. Prices in some parts of the nation have fallen to below $2 -- including Oklahoma, Texas and Ohio -- after topping $4 just a few weeks ago.

Over the past week, a gallon of regular gasoline fell more than 25 cents, the Department of Energy reported Monday.

The decline in crude prices comes one day after oil prices jumped $4.77, or 8 percent, to $67.50 a barrel after the Fed cut its key interest rate, trying to stem the worst U.S. financial crisis in decades.

That drove down the value of the dollar. Investors often buy commodities such as crude oil as an inflation hedge when the dollar weakens and sell those investments when the greenback rises.

The Fed also announced it will supply new lines of credit worth up to $30 billion to the central banks of South Korea, Brazil, Mexico and Singapore to shore up confidence and help deal with the global credit crisis.

In other Nymex trading, gasoline futures fell 6.3 cents to $1.469 a gallon, while heating oil fell nearly 3 cents to fetch $1.9725 a gallon. Natural gas for November delivery fell 5.3 cents to $6.725 per 1,000 cubic feet.

In London, December Brent crude fell $1.96 to $65.54 a barrel on the ICE Futures exchange.