Oil falls as investors worry about demand

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Special Reportfull coverage

Oil climbs above $78 on inventory decline Oil rises on surprise inventory drop Exxon's drilling juggernaut Oil climbs above $74 Oil pares gains, settles lower Oil rises on weaker dollar

NEW YORK (CNNMoney.com) -- Oil prices fell back below $80 a barrel Tuesday as the Bush administration's unprecedented plan to inject $250 billion into the nation's banking system failed to allay fears of a decline in demand due to recession.

U.S. crude for November delivery ended the day down $2.56 to $78.63 a barrel.

"Demand is still the overriding issue," said analyst Jim Ritterbusch, president of Ritterbusch and Associates in Illinois.

The Bush administration on Tuesday announced an aggressive plan to restore bank confidence and free up credit by insuring non-interest bearing bank accounts and purchasing up to $250 billion in banks' preferred shares.

News of the plan pushed oil as high as $84 a barrel during Tuesday trading as investors hoped that U.S. and European efforts would help prop up struggling banks and financial institutions. European nations announced a $2 trillion plan to back banks on Monday.

However the rally quickly reversed, following stocks lower, as investors focused on declining fuel consumption.

The market is "in somewhat of a holding pattern until we get guidance," said Ritterbusch, referring to the decline in demand for crude products that has dominated the market for the past several months.

Demand and inventory numbers from the Energy Department are scheduled for release Thursday at 11 a.m. ET. The report is delayed a day due to the Columbus Day holiday.

Concern about demand had pushed oil prices down about 44% from a record high of $147.27 a barrel in mid-July. Prices rebounded from a 13-month low on Monday after the European plan was announced.

Oil prices jumped Monday alongside the Dow Jones industrial average, which registered its largest single-day point gain in history.

As the economy slows, crude investors have been worried about falling demand for fuel. When money is tight, energy expenditures are often among the first things that businesses and consumers cut back, according to analysts.

The price of gasoline fell 4.3 cents to a national average of $3.163 a gallon, according to a daily survey from motorist group AAA released Tuesday.

Continued demand worries: Investors worried that, despite government efforts, the global economy remains crippled and crude demand will continue to slide in the near future.

"It's a deflationary environment out there," said Steve Brassey, senior broker with Sonic Futures in California, who believes prices for oil and other commodities will continue to slide as the global economy slows.

"I want to operate from the short side for sure," he said, referring to a trading technique that capitalizes on falling prices.

Chinese economy: Demand in rapidly expanding China may also suffer.

China posted a 10% increase in oil imports for the month of September, compared to a year earlier, according the nation's customs department. However a report by the Wall Street Journal pointed out signs, such as a decline in steel production, that the Asian nation's economy was slowing down

Also, the oil data released by the country is limited in scope. "We simply don't have the transparency there we'd like to see," said Ritterbusch.

BP find: Meanwhile, oil and gas company BP America, a branch of U.K.-based BP (BP), announced that it had made its third oil discovery in the deepwater Gulf of Mexico about 70 miles southeast of the Louisiana coast.

However, the find had little impact on short-term oil prices, since the company still needs to appraise the site to determine how much oil it contains, as well as the commercial viability of expensive deepwater drilling there.

Developing a new deepwater discovery in the Gulf can take between 7 and 10 years, according to BP spokesman Daren Beaudo.