Oil prices tank nearly $4

Oil prices extended their losses after a government report showed crude supplies didn't fall as much as analysts had expected.

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NEW YORK (CNNMoney.com) -- Oil prices fell nearly $4 Wednesday, adding to steep losses Tuesday, on a healthier-than-expected U.S. inventory report and speculation OPEC will boost production.

U.S. light crude for January delivery slid $3.80 to $90.62 a barrel on the New York Mercantile Exchange. Oil had traded down 57 cents just prior to the report's release.

In its weekly inventory report, the Energy Information Administration said crude stocks fell by 400,000 barrels last week. Analysts were looking for a drop of 500,000 barrels, according to a Dow Jones poll.

Although crude stocks fell overall, EIA reported an increase at Cushing, Okla., where oil for the NYMEX contract is stored and closely watched by traders as a gauge of overall supply levels.

Distillates, used to make heating oil and diesel fuel, fell by 100,000 barrels. Gasoline supplies rose by 1.4 million barrels. Analysts were looking for a 1 million barrel decline in distillate supplies and a 600,000 barrel increase in gasoline stockpiles.

EIA also said refineries, operating at 89.4 percent capacity, processed more crude than expected.

Oil prices, biting at the $100 mark for the better part of two weeks, fell by more than $3 a barrel Tuesday on speculation OPEC will boost production and the Federal Reserve will hold interest rates steady.

Ministers from the Organization of Petroleum Exporting Countries meet Dec. 5 in Abu Dhabi, and the cartel could boost production by 500,000 to 1 million barrels per day.

Several comments from OPEC ministers over the last few days have indicated a supply increase is coming.

"We are prepared to raise our production to supply oil when and wherever required," OPEC President Mohamed Al Hamli, who doubles as energy minister for the United Arab Emirates, told the Associated Press. "There's nothing on the agenda, [but] we are willing to supply more to the market."

But a supply hike is not guaranteed. On Wednesday Saudi Arabia's oil minister Ali al-Naimi said oil markets were well supplied, pointing to oil inventories in developed countries that are near their 5-year average.

He blamed high prices on a falling dollar, speculation and fears of a supply disruption, according to the Associated Press.

Traders are also watching the Federal Reserve, which holds a policy meeting on interest rates Dec. 11.

Another rate cut would most likely send oil prices higher. Lower rates generally stimulate economic growth and would likely further depress the already weak dollar.

"An OPEC increase and a Fed refusal to lower rates could well be the one-two punch this market has been waiting for to sell off," Peter Beutel, an oil analyst at consultancy Cameron Hanover, wrote in a research note Wednesday.

But the chances the Fed will hold rates steady are slim - markets are fully pricing in a rate cut of at least a quarter percentage point.

Oil prices have jumped about 16 percent in a little over a month. Retail gasoline prices, at first shielded from rising crude prices due to slack demand, have caught up - although they appear to be leveling off.

The nationwide average price for a gallon of regular gas is now $3.09, up from $2.75 a month ago but holding steady from last week, according to the motorist organization AAA. Last year, motorists were paying about $2.23 a gallon.

Crude oil is now at or near all-time highs, even when adjusted for inflation. The last time oil was this high was in 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 hotly debated. Some analysts note that only a small percentage of contracts are held by speculators - investment banks, hedge funds and others who are not end users of oil.

They point to rising growth in developing economies 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 lower.

Others say there is plenty of supply and these investors are pouring money into oil because the commodity is easier to buy on margin than stocks. Margin buying is a risky technique that involves purchasing contracts with borrowed money.

These analysts say fundamentals - such as rising demand from India and China - have been known for some time, yet note that crude has fluctuated from below $50 a barrel to near $100 just this year.

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 such as Iran, Nigeria and Venezuela.