Oil down on lower-than-expected U.S. gas supplies

NEW YORK — Oil prices closed at their lowest level in five months Thursday as a lower-than-expected drop in U.S. gasoline supplies gave traders more reason to believe that a cooling economy is forcing Americans to drive less.

Light, sweet crude for October delivery fell $1.46 to settle at $107.89 a barrel on the New York Mercantile Exchange. It was the lowest settlement price for a front-month contract since April 4.

Crude prices have fallen for five straight sessions, extending an almost two-month slide as traders shift their attention away from supply-threatening storms and back toward a stronger dollar and evidence of falling demand.

On Wednesday, oil prices settled 36 cents lower at $109.35 a barrel, a day after a dramatic, nearly $6 plunge in response to less damage from Hurricane Gustav than the oil industry feared. That brought crude prices in sight of $100 a barrel, a level not seen since April 1.

A smaller-than-expected drawdown of U.S. gasoline stocks was the primary driver of Thursday's declines.

In its weekly inventory report, the Energy Department's EIA said U.S. gasoline stocks fell by 1 million barrels to 194.4 million barrels for the week ending Aug. 29, less than the 1.8 million-barrel drop analysts surveyed by energy research firm had Platts expected.

Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill., said the inventory numbers may have been skewed by market irregularities caused by Gustav, but he said the market appeared to be taking the figures as more evidence of falling demand.

"It's safe to say gasoline demand is still very weak. So far we haven't seen enough of a drop in pump prices to really alter that trend," Ritterbusch said.

At the pump, a gallon of regular slid less than a penny overnight to a new national average of $3.678, according to auto club AAA, the Oil Price Information Service and Wright Express. Prices remain well above the year-ago average of about $2.792 a gallon but have fallen more than 10 percent from the July 17 record average of $4.114 a gallon.

A stronger dollar also weighed on oil prices Thursday. A rising greenback spurs investors to shift funds out of commodities like oil and precious metals, which are traditionally bought as hedges against inflation.

Meanwhile, energy output in the Gulf of Mexico began to slowly come back online after the passage of Gustav. Some oil companies in the western Gulf whose equipment wasn't in the path of the storm began ramping up operations Wednesday and Thursday.