Oil slips on supplies, economy

Oil prices fall as supplies gain and reports suggest easing demand, slowing economy.

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NEW YORK (CNNMoney.com) -- Oil prices fell Thursday on signs of lower demand, a weakening economy and a surprise gain in U.S. supplies.

U.S. light crude for December delivery fell 66 cents to $93.43 a barrel on the New York Mercantile Exchange. Oil traded down 53 cents just prior to the report's release.

In its weekly inventory report, the Energy Information Administration said crude stocks rose by 2.8 million barrels last week. Analysts were looking for a drop of 300,000 barrels, according to a Dow Jones poll.

Gasoline supplies also showed a surprise gain, increasing by 700,000 barrels compared to the 100,000 drop predicted.

But distillates, used to make heating oil and diesel fuel, declined by 2 million barrels. Analysts were looking for a drop of just 300,000 barrels.

Oil prices made a run at $100 a barrel last week but never topped the triple-digit threshold, peaking at $98.62 on Nov. 7. Prices have eased a bit since then as the dollar regained some ground, stocks markets slid and traders booked profits after prices surged from under $80 a barrel just a month ago.

EIA also said refineries, running at 87.7 percent capacity, processed more crude than expected. Imports also increased and were higher than the recent average, possibly due to a return of some Mexican oil that was shuttered the previous week.

Oil traded down earlier in the morning after OPEC lowered its projected demand for the fourth quarter.

In its monthly oil market report, the Organization of Petroleum Exporting Countries said demand for oil would rise 1.97 percent, down from previous estimates of a 2.1 percent increase.

Signs of a weakening economy in the U.S. also pushed crude prices lower.

Reports Thursday morning showed a spike in unemployment claims and rising consumer prices. A slowing economy would hurt demand for oil.

Retail gasoline prices, shielded from rising crude prices over the last several weeks as demand remained low, have begun to catch up.

The average price for a gallon of regular nationwide is now $3.11, up from $2.75 a month ago, according to the motorist organization AAA. Last year motorists were paying about $2.23 a gallon.

Crude is now at or near all-time highs, even adjusted for inflation. The last time oil was this high was the early 1980s, when it rose to (an inflation-adjusted) $93 to $101 a barrel, depending on the inflation calculation used and the oil contract cited.

Crude oil prices have surged nearly five-fold since trading below $20 a barrel in 2002. Analysts say surging global demand combined with limited new supply is the main underlying factor.

The surge in prices has also attracted lots of speculative investment money, further driving prices higher.

The impact speculative investment has on prices is under debate. Some analysts note that only a small percentage of contracts are held by speculators - investment banks, hedge funds and others that are not end users of oil. They point to rising growth in India and China when asked why oil prices are so high, and also note these investors can cause the price to fall just as dramatically and quickly when the market turns down.

Others say there is plenty of supply and these investors are pouring money into oil because oil is easier to buy on margin than are stocks. Buying on margin is when only a small percent of the worth of the contract is required to trade it.

They say fundamentals - like rising demand from India and China - have been known for some time, yet note that crude has fluctuated from below $50 to near $100 just this year, and say that is evidence of pure speculation.

Either way, world oil supplies are currently stretched. That tight supply and demand situation magnifies the effect that geopolitical tensions have on prices, as there is less spare supply available globally to cover disruptions from places like Iran, Nigeria or Venezuela.

The falling U.S. dollar has also played a role, as oil worldwide is priced in dollars. Oil-producing nations have less incentive to ramp up output if the buying power they receive per barrel is declining, and foreign consumers have less incentive to reduce demand if oil is, relatively, getting cheaper for them.