Oil drop biggest in 17 years

NEW YORK (CNNMoney.com) -- Oil prices experienced the sharpest plunge in 17 years on Wednesday, driven down by weakening demand and a stronger dollar.

U.S. light crude for April delivery fell $4.94 a barrel to settle at $104.48 on the New York Mercantile Exchange.

The drop in oil was the largest single-day slide in dollar terms since Jan. 17, 1991, when oil fell by a third, or $10.56, after the United States launched an attack against Iraq to begin the first Gulf War.

In percentage terms, oil fell 4.51% on Wednesday - the biggest drop by that measure since August.

Oil has dropped more than $4.50 in two of the past three days. Crude prices are more than $7 lower than they were when oil hit a record trading high of $111.80 on Monday.

On Wednesday, oil started the day trading lower after the Federal Reserve cut its key lending rate by 3/4 of a percentage point a day earlier. The cut was less than the full point expected by some investors, sparking a rally in the dollar and weighing on dollar-traded commodities such as oil.

"As the dollar strengthens, oil prices in non-dollar-denominated terms become more expensive," giving traders incentive to sell, said Stephen Schork, publisher of the Schork Report, an oil industry newsletter.

Demand pulls back

The other factor pushing oil lower on Wednesday was the release of the U.S. Energy Information Administration's weekly report.

The report showed that demand for motor gasoline fell 0.1% last week, to about 9.1 million barrels a day, compared to the same period a year earlier.

The decline in demand comes as average gas prices remain close to their record high levels, according to a survey released by AAA, a motorist advocacy group.

According to the survey, the average price of gasoline fell a tenth of a cent overnight to $3.279 per gallon. Gas prices hit their record high of $3.285 a gallon on Sunday.

In response to the decrease in demand, refineries reduced gasoline production slightly last week to 9 million barrels a day.

Refineries not producing

"Refining margins have been horrible," said Phil Flynn of Alaron Trading in Chicago. Because consumer demand has been declining, refineries simply aren't producing as much, he said.

The EIA said crude stocks rose by 200,000 barrels last week. But that was well below the 2.3-million barrel increase expected in a consensus of analysts polled by Platts, the energy research division of McGraw-Hill Cos.

Gasoline inventories and stockpiles of distillates, which are used to make heating oil and diesel fuel, also disappointed.

Gasoline supplies fell by 3.5 million barrels while distillates fell by 2.9 million barrels. Analysts were looking for only a 200,000 barrel fall in gasoline stockpiles and a 1.6 million barrel decrease in distillate supplies.