Jittery Trading Day Sends Oil Prices Down

Oil prices closed slightly lower in jittery trading Wednesday, as the strengthening dollar and signs of a slowing economy outweighed inventory drops and word that OPEC would cut production.

The Energy Department's Energy Information Administration said that crude inventories fell by 5.9 million barrels last week compared to the previous week, and that gasoline inventories fell by 6.5 million barrels. The EIA also reported, however, that inventories of distillates - which include heating oil and diesel fuel - fell by a lower-than-anticipated 1.2 million barrels.

Refineries were running at a low 78.3 percent of their capacity last week, the report said.

"It's being seen as somewhat aberrant because of the storms," said John Kilduff, senior vice president of risk management at MF Global LLC. "But I don't think you can ignore this data."

Light, sweet crude for October delivery fell 68 cents to settle at $102.58 a barrel on the New York Mercantile Exchange, after initially jumping on the EIA's report. It was crude's lowest close since April 1. The contract fell by more than $3 a barrel in the previous session.

In London, October Brent crude fell $1.37 to settle at $98.97 a barrel on the ICE Futures exchange.

The supply readings came after OPEC said it would reduce output by 520,000 barrels a day.

The Organization of Petroleum Exporting Countries, however, decided not to take the more dramatic step of slashing production targets. The decision was viewed as a compromise meant to avoid a backlash from the biggest petroleum consuming nations while halting the rapid decline in oil prices.

A number of analysts said they did not expect OPEC's output decision to spark a sustained rally in oil prices, as investors remain concerned over slowing economic growth in the U.S, Europe and Japan.

"All they're saying is, 'We've been cheating for the past year.' ... I don't think the market's going to take it that seriously," analyst and trader Stephen Schork said by phone from Vienna. "I think the general mood is we are heading lower."

Antoine Halff, an energy analyst with Newedge USA, said OPEC's move could "be the most bearish signal to date in the oil market rout."

"The ministers appear genuinely concerned that the bottom is falling out of global demand and that once depleted stocks are rebounding with a vengeance," Halff said in a note. "Their panic is a testament to how soft the market has become. It is likely to grow even softer."

"You just can't fight the weight of the market right now," said Darin Newsom, senior analyst at DTN in Omaha, Nebraska. "I still think we're going to drop below $100."

Accumulating evidence that demand for crude is falling away in developed nations has created an exodus from the oil markets. The EIA's report Wednesday showed that demand for gasoline, distillate fuel and jet fuel over the past four weeks a falling from last year's levels.

The U.S. dollar rose against the euro, pound and yen, encouraging investors who used commodities to hedge against a weakening dollar to unwind those bets.

At 5 p.m. EDT, Ike was just off the coast of western Cuba, 90 miles west-southwest of Havana. It was moving west-northwest at 10 mph and its maximum sustained winds were 75 mph. It was expected to cross the Gulf of Mexico, strengthening to a Category 3 with winds of up to 130 mph.

Forecasters said that it could hit on Saturday morning about anywhere along the Texas coast, with the most likely spot close to Corpus Christi, where there are number of refineries.

The U.S. Department of the Interior's Minerals Management Service said that as of Wednesday, about 95.9 percent of oil production and about 73.1 percent of natural gas production in the Gulf remained shuttered as Hurricane Ike approaches Texas. Oil and gas operators have had the bulk of their production shut down since they began preparing for Hurricane Gustav nearly two weeks ago.

In other Nymex trading, heating oil futures fell 2.23 cents to settle at $2.9024 a gallon, while gasoline prices gained about a penny to settle at $2.6616 a gallon.

Natural gas for October delivery fell 14.2 cents to settle at $7.393 per 1,000 cubic feet; the EIA is scheduled to release its weekly reading on natural gas in U.S. storage on Thursday.