(CBS/AP) Oil prices dropped below US$127 a barrel Wednesday, extending a decline of more than US$3 in the previous session on a growing sense that soaring prices have cut demand for gasoline and other fuel.
The normally busy summer driving season in the U.S. began with the just-ended Memorial Day weekend, and some analysts are predicting that data will show it had a lackluster start.
"It definitely was lower than (previous) Memorial Day weekends," said Tom Kloza, publisher and chief oil analyst at the Oil Price Information Service in Wall, New Jersey.
Late afternoon in Singapore, light, sweet crude for July delivery was down US$1.93 at US$126.92 a barrel in electronic trade on the New York Mercantile Exchange. The contract fell US$3.34 to settle at US$128.85 a barrel Tuesday, the first day of trade after the Memorial Day holiday.
The front-month contract is now more than US$8 off its all-time peak of US$135.09 a barrel, hit last Thursday.
U.S. Energy Department data covering the weekend won't be released until next week. But even ahead of those figures, other statistics indicated Americans were driving less because of bloated prices at the pump.
The Schork Report, edited by Stephen Schork, cited the latest statistics from the Federal Highway Administration, noting that "estimated vehicle miles traveled ... on all U.S. public roads for March 2008 fell 4.3 percent, or 11 billion, as compared with March 2007 travel.
"In fact, this is the first time estimated March travel fell since 1979 and the largest year-on-year drop in the history of the report, which dates back to 1942," said the newsletter
In a research note, Edward Meir, an analyst at MF Global UK Ltd. noted that if those trends continue "we could be heading for the first annual drop in gasoline consumption in some 17 years."
The United States is the world's largest energy consumer and fluctuations in demand there can have an outsized impact on international oil prices. Also, since Americans are particularly reliant on their cars due to a lack of mass transport in all but a few cities and they have to drive longer distances to their jobs, their consumption of gasoline is closely watched.
The decline came in the face of supply problems in Mexico and Nigeria that could have driven oil prices higher. That's an indication that demand concerns are weighing on the market and giving investors reason to pull back from the record high oil prices, analysts said.
Michael Lynch, president of Strategic Energy & Economic Research Inc. in Winchester, Massachusetts, thinks energy investors are selling on recent data showing that Americans are driving less due to high prices. That includes the weekly Energy Department reports that show gasoline demand is falling and the Federal Highway Administration data showing Americans drove fewer miles in March.
Bloomberg News' Deirdre Bolton told CBS' The Early Show that Americans aren't showing caution just behind the steering wheel, but in all aspects of their spending, referring to Tuesday's Consumer Confidence Index which was at its lowest point in nearly 16 years.
"This deepening housing slump, gasoline near $4 a gallon, rising food costs, also mounting job losses - all adding up to Americans trying to spend less," said Bolton. "Now while that might be the right strategy to run your household, it does have economists worried. Consumer spending accounts for two-thirds of GDP, so if consumers don't spend, the economy could slow down even further."
Oil prices were also pressured by the dollar, which gained ground against the yen and euro. Investors who buy commodities such as oil as a hedge against inflation when the dollar falls tend to sell when the greenback strengthens. Also, a rising dollar makes oil more expensive to overseas investors.
Investors shrugged off a number of events that could have sent oil prices higher, including news that crude oil production in Mexico fell 13 percent in April compared with the previous year, the temporary shutdown of a North Sea oil platform and the latest in a spate of oil-pipeline bombings in Nigeria.
Investors also ignored continued strength in heating oil futures, which have over the last month helped send crude oil smashing through a string of new record highs. Distillate supplies worldwide are seen as strained due to strong demand for diesel from Europe and Asia.
In other Nymex trading, June heating oil futures fell nearly 5 cents to US$3.7508 a gallon, while gasoline futures slipped by more than 3 cents to US$3.486 a gallon. Natural gas futures fell by just over 6 cents to US$11.740 per 1,000 cubic feet.
July Brent crude fell US$2.12 to US$126.17 a barrel on the ICE Futures exchange in London.