Oil Drops More Than $2 After Supply Gains First Time in 6 Weeks

Crude oil fell more than $2 a barrel after record fuel prices cut consumption, causing U.S. inventories to rise for the first time in six weeks.

Stockpiles gained 803,000 barrels to 301.8 million last week, the Energy Department said. A 1.1 million-barrel drop was forecast by analysts in a Bloomberg News survey. Fuel demand averaged 20.2 million barrels a day in the past four weeks, down 2.3 percent from a year earlier, the report showed.

``There's no question that high prices are having an impact on driving patterns and gasoline demand,'' said Rick Mueller, director of oil practice at Energy Security Analysis Inc. in Wakefield, Massachusetts. ``We had a nice crude-oil build and the market is responding as it should.''

Crude oil for August delivery declined $2.45, or 1.8 percent, to settle at $134.55 a barrel at 3:11 p.m. on the New York Mercantile Exchange. Futures touched a record $139.89 on June 16.

Gasoline for July delivery fell 6.94 cents, or 2 percent, to settle at $3.3941 a gallon in New York. Futures reached a record $3.5762 a gallon on June 16.

Pump prices are closely tracking futures. Regular gasoline, averaged nationwide, fell 0.2 cent to $4.067 a gallon, AAA, the nation's largest motorist organization, said today on its Web site. Pump prices reached a record $4.08 a gallon on June 16.

Prices are also lower because the United Arab Emirates said it's ready to boost supplies, if needed. Saudi Arabia said on June 22 it would increase daily crude-oil output by 200,000 barrels to 9.7 million barrels next month. Saudi Arabia and the U.A.E. are the biggest and third-largest producers in the Organization of Petroleum Exporting Countries.

Interest Rates

Oil was unchanged from earlier trading after the Federal Reserve left its benchmark interest rate at 2 percent, ending the most aggressive series of rate cuts in two decades, as record energy prices threaten to increase inflation.

Futures have almost doubled over the past year as investors looking to hedge against the dollar's drop have purchased commodities, helping push oil, gold and corn to records. Rising Asian fuel consumption and falling output in the North Sea, Russia and Mexico have contributed to the rally.

Arjun N. Murti, the Goldman Sachs analyst who last month said oil may rise to $200 a barrel within two years, increased his forecasts, in a report dated June 18, because output is failing to match demand. U.S. benchmark West Texas Intermediate crude oil may average $118 a barrel this year and $140 a barrel next year, Goldman analysts led by Murti wrote in the report.

`New Fundamentals'

Daniel Yergin, chairman of Cambridge Energy Research Associates, told a congressional panel that oil prices are being driven by ``new fundamentals'' involving the merging of oil and financial markets. He added that the price of oil has hit a ``break point'' where the U.S. will begin to seek alternatives.

Gasoline demand has averaged 9.28 million barrels a day over the past four weeks, down 2.1 percent from the same period last year, the department said. Demand for distillate fuel, a category that includes heating oil and diesel, averaged 4.06 million barrels a day, down by 1.1 percent from a year earlier.

``In our view, 2007 may well have been the top, the break point, in terms of U.S. gasoline demand,'' Yergin said in prepared testimony to the Joint Economic Committee.

Consumption of gasoline in the U.S. increases during the summer, when Americans take to the highways for vacations.

``More attention is now being paid to the demand numbers, and they are having an impact on prices'' said Tim Evans, an energy analyst for Citi Futures Perspective in New York. ``Prices shrugged off weakening demand but it has probably gotten to a point where it can be ignored no longer.''

Oil supplies dropped 24.8 million barrels, or 7.6 percent, in the five weeks ended June 13.

Fuel Stockpiles

Gasoline stockpiles fell 153,000 barrels to 208.8 million barrels, the department said. Analysts surveyed before the report were split over whether supplies would rise or fall.

Distillate-fuel inventories rose 2.82 million barrels to 119.4 million barrels in the week ended June 20, the seventh- straight increase, the report showed. A 2 million-barrel gain was forecast. Stockpiles last week were 1.1 percent higher than the five-year average, the department said.

``The size of the distillate increase was a surprise and is also contributing to the downdraft in prices,'' Evans said.

Record energy prices have hit airline profits and are now threatening plane manufacturers. Boeing Co., the No. 2 commercial planemaker, fell the most in more than five years after Goldman Sachs Group Inc. cut its rating to ``sell'' on concern that surging fuel prices and a weakening economy will slow orders.

Boeing declined $5.15, or 6.9 percent, to $69.64 at 4:15 p.m. in New York Stock Exchange composite trading. It was the biggest drop since Aug. 13, 2002.

Brent crude oil for August settlement fell $2.13, or 1.6 percent, to settle at $134.33 a barrel on London's ICE Futures Europe exchange. Prices climbed to a record $139.32 on June 16.