Click to play videoNew York: Oil fell by more than $1 on Thursday as concerns over weak demand in a softening U.S. economy outweighed an unexpected drop in U.S. crude oil inventories and continued production problems in the wake of Hurricane Gustav.
U.S. crude fell $1.46 to $107.89 a barrel, extending a slide from the all-time peak in mid-July of over $147. London Brent crude fell $1.76 to $106.30.
"I've got to believe that the market, in its wisdom, is looking at other factors and is preoccupied with the state of the economy, declining demand and a strengthening dollar," said Peter Beutel, president of Cameron Hanover, New Canaan, Connecticut.
U.S. government inventory data showed total demand for oil products, such as gasoline and distillates, over the past four weeks fell 3.5 per cent from a year ago, continuing a trend of weak consumption in the midst of an economic downturn.
The U.S. dollar's further rebound encouraged oil's losses by weakening the spending power of buyers using other currencies, dealers said.
The oil market shrugged off a government report showing crude U.S. oil inventories fell 1.9 million barrels last week, compared with a forecast of a 200,000 barrel increase.
Those inventories are likely to keep sliding in coming weeks as the U.S. energy sector makes slow progress in its recovery from Hurricane Gustav, with some 25 per cent of U.S. crude oil production still shut in the storm's wake.
Production shutdowns in the Gulf of Mexico already have cut 7.4 million barrels of cumulative output, about a third of the amount of oil the United States consumes in a day, according to government data.
But dealers said demand is also likely to slow sharply, with some 11 per cent of the nation's refining capacity shut down by Gustav. Refiners use crude oil to make fuels like gasoline and diesel.
Hurricane Ike, meanwhile, strengthened into an extremely dangerous Category 4 hurricane in the open Atlantic, although it posed no immediate threat to land.
Director-Asia, Hudson Capital Energy, Jonathan Kornafel said, "The hurricane Gustav did set off some reactions out there and you also have statements coming out of OPEC. Iran especially saying that the market is over supplied and they do particularly have a point. Whether or not they issue a statement next week saying they are going to cut back on production which I do not think is going to happen. I think they are slowly going to bring down the levels to an earlier agreement because the world does seem to be under supplied at the moment. In that sense, I think we are going to trend lower."
Traders are awaiting OPEC's Sept. 9 meeting. Analyst PFC said a consensus was building within OPEC to cut output to support prices and prevent a supply overhang from developing.
Iran has said the producer group may need to cut oil supplies by as much as 1.5 million barrels per day (bpd), nearly 5 per cent, to balance global markets by early next year.
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