May 30, 2008 4 min read

NEW YORK (AP) – Oil prices fell sharply Thursday after the Energy Department reported unexpected declines in crude oil supplies last week but said the drop was due to temporary delays in unloading oil tankers along the Gulf Coast. The decline of more than $4 came as a stronger dollar and concerns about gas demand also weighed on prices.

Retail gas prices, meanwhile, rose to a new record above $3.95 a gallon.

Light, sweet crude for July delivery fell $4.41 to settle at $126.62 a barrel on the New York Mercantile Exchange. It was the lowest settlement in two weeks and the biggest single-day price drop since March 19.

In Washington, meanwhile, the Commodity Futures Trading Commission revealed that it is six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation. The CFTC also announced a handful of initiatives designed to increase transparency of the energy futures markets.

The commission said it started the probe in December and was publicizing the investigation “because of today’s unprecedented market conditions.”

Disclosure of the investigation may have contributed to oil’s declines, analysts said.

“That’s regulation that could change the landscape of what people have gotten used to,” said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.

After Thursday’s inventory report, prices initially strengthened, then fell. The ambivalent reaction partly reflects a deeper battle between investors who believe prices have risen far beyond levels that can be justified by underlying supply and demand fundamentals and those who believe speculative money will continue flowing into oil futures, sending prices higher regardless of the market’s fundamentals.

“You’re seeing some big funds in there throwing money around on both sides of the market,” said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Ill.

But the magnitude of the day’s price decline suggested to some analysts that the bullish momentum that pushed prices over $135 as recently as one week ago may be running out of steam.

“This was the first time we’ve had a bearish reaction,” to news that in the past would surely have driven prices higher, Cordier said.

In its weekly inventory report, the department’s Energy Information Administration said crude oil inventories fell 8.8 million barrels last week, while gasoline supplies fell 3.2 million barrels. Analysts surveyed by energy research firm Platts had expected slight increases in supplies of both.

But the EIA also offered a rare explanatory note on the Gulf Coast tanker problems. Gulf ports have closed many times in recent months due to fog, said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

Also putting some weight on prices were supplies of distillates, including heating oil and diesel fuel, which rose 1.6 million barrels last week, double what analysts had expected. July heating oil futures plummeted 13.58 cents to settle at $3.6885 a gallon on that news.

The surprise drop in gasoline supplies propelled June gas futures to a new trading record of $3.52 a gallon on the Nymex. But gas later retreated, following the rest of the complex, to settle down 4.34 cents at $3.4042 a gallon.

At the pump, meanwhile, the average national price of a gallon of gas rose 0.8 cent Thursday to a record $3.952, according to a survey of stations by AAA and the Oil Price Information Service. Analysts and the Energy Department forecast prices will rise above the psychologically important $4 level soon on a national basis. Prices are already that high in many parts of the country, and are averaging more than $4 in 11 states and the District of Columbia.

Diesel prices are also soaring. The national average price of a gallon of diesel fuel rose 0.9 cent Thursday to a record national average of $4.787. Diesel prices are above $5 a gallon in some areas, and are pulling prices of food and consumer goods higher because diesel is used by most trucks, trains and ships.

High prices are cutting consumers’ appetite for fuel, so demand fell slightly over the last four weeks, EIA data indicated.

Crude futures also faced headwinds from the dollar, which rose Thursday against the euro and British pound. Investors who buy commodities such as oil as a hedge against inflation when the dollar is falling tend to sell when the greenback strengthens. Also, a stronger dollar makes oil more expensive to investors dealing in foreign currencies.

In other Nymex trading, July natural gas futures fell 52.1 cents to settle at $11.474 per 1,000 cubic feet. In a separate report, the EIA said natural gas inventories rose 87 billion cubic feet last week, in line with analyst estimates.

In London, July Brent crude fell $4.04 to settle at $126.89 on the ICE Futures Exchange.

AP-ES-05-29-08 1553EDT