Oil Drops on Speculation U.S. Fuel Demand Will Weaken Further

By Grant Smith

July 31 (Bloomberg) -- Crude oil declined on speculation that high prices and slowing economic growth will further reduce demand in the U.S., the world's biggest energy user.

U.S. fuel consumption averaged 20.2 million barrels a day in the past four weeks, down 2.4 percent from a year earlier, according to a weekly report by the Energy Department yesterday. Nigeria, the U.S.'s fourth-largest supplier, said production remains close to 2 million barrels a day even after recent pipeline attacks.

The price ``is not sustainable,'' said Eugen Weinberg, an analyst at Commerzbank AG in Frankfurt. ``We've seen some demand destruction already. Prices will go back to $120, and $110 before the end of the year.''

Crude oil for September delivery fell as much as $1.21, or 1 percent, to $125.56 a barrel. The contract traded for $125.79 at 1:24 p.m. London time. Prices are 62 percent higher than a year ago.

Futures gained $4.58, or 3.8 percent to settle at $126.77 yesterday, the highest close since July 22, after the Energy Department report showed gasoline inventories fell for the first week in five.

Gasoline supplies dropped 3.53 million barrels to 213.6 million barrels last week, compared with a gain of 350,000 barrels estimated in a Bloomberg News survey.

``On closer examination the gasoline data should not be regarded as that supportive,'' said Gareth Lewis-Davies, research analyst at Dresdner Kleinwort Group Ltd. ``Deliveries from refineries and terminals into the wholesale market were very large indeed, while other data has shown continuing weak retail gasoline sales.''

Even with the inventory drop, gasoline stockpiles remain 3 percent higher than the five-year average for the period.

``Do not be fooled,'' said Robert Laughlin, senior broker at MF Global Ltd. in London. ``Yes, the draw was impressive, but demand still weakens across the U.S. on a weekly basis in the midst of the driving season.''

Brent Crude

Brent crude oil for September settlement traded at $125.85 a barrel, down $1.25, at 1:18 p.m. London time on London's ICE Futures Europe exchange. The contract rose $4.39, or 3.6 percent, yesterday to settle at $127.10.

Prices are likely to slide toward $110 before the end of the year unless supply risks intensify in Iran or Nigeria, Commerzbank's Weinberg said.

Nigerian Petroleum Minister of State H. Odein Ajumogobia denied newspaper reports that militant sabotage, such as an assault this week on a Royal Dutch Shell Plc pipeline, had reduced national output to less than a million barrels a day.

Iranian Supreme Leader Ayatollah Ali Khamenei said his country will push forward with its uranium enrichament program. Speculation that Israeli will use force to stop Middle East's second-largest exporter from acquiring nuclear technology has supported prices since 2006.

To contact the reporter on this story: Grant Smith in London at gsmith52@bloomberg.net