Oil settles at 21-month low on demand jitters

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Oil climbs above $74 Oil pares gains, settles lower Oil rises on weaker dollar Oil dips near $72 on stronger dollar Oil climbs nearly 3% on inventory drop Oil rallies after a 9-day retreat

NEW YORK (CNNMoney.com) -- Oil prices settled at a 21-month low Wednesday as investors worried about a global slowdown in crude demand ahead of the latest U.S. government inventory report.

Light, sweet crude for December delivery settled down $3.17 to $56.16 a barrel Wednesday. The last time prices traded at this level was Jan. 29, 2007.

Wednesday is also the second day in a row during which oil traded below $60 a barrel, bringing the two-day loss to nearly $7.

The price of oil has steadily been declining for months, falling about 60% from July's all-time high above $147 a barrel as fears about global economic weakness continue to undermine demand for gasoline and other petroleum products.

"The extent of the retreat in demand has caught many people by surprise," said John Kingston, director of oil at Platts, the energy information arm of McGraw-Hill Cos. "Demand destruction is due to higher [gas] prices, which have caused U.S. drivers to change habits."

Investors have also sloughed off talk of further production cuts from the Organization of Petroleum Exporting Countries. OPEC president Chakib Khelil recently said OPEC would consider further output reductions if the price of oil continues to fall.

Inventory on tap. Thursday brings the latest reading on crude inventories from the Energy Information Administration.

Forecasts call for an increase of 1.1 million barrels, according to a survey by Platts. Rising inventories exacerbate demand worries.

"Demand is falling all over the world and is now driving oil and commodities in a historic readjustment in the world economy," wrote Phil Flynn, senior market analyst at Alaron Trading, in a note to clients.

Demand concerns were briefly tempered Tuesday after the Chinese government announced a $586 billion plan to boost economic activity in one of the world's key consumers of oil. But investors now appear less optimistic about the plan, which will take time to implement.

"China has to stimulate its demand for commodities in the first place and that fact is still reverberating around the pits," wrote Flynn.

Gasoline: Retail gas prices fell for the 56th day in a row to just above the $2.20-a-gallon mark, according to a survey released Wednesday by motorist group AAA.

The average price of unleaded regular gas dropped 1.8 cents to $2.202 a gallon from $2.22, according to AAA.

Wednesday's national average has now dropped 46.5%, or $1.912, from the record high of $4.114 a gallon set July 17.

Dollar: The dollar soared to a 6-year high against the British pound Wednesday on concern that the Bank of England may make aggressive cuts to a key interest rate to combat a deepening recession.

The British pound plummeted 4.2 cents to $1.496 from $1.538 late Tuesday as the country's central bank released a pessimistic monthly inflation report and hinted at a key interest rate cut. The pound traded at its lowest level since June 2002, when the British currency bought $1.487.

Because oil and other commodities are traded in dollars, a stronger dollar makes crude more expensive for foreign investors.

CNNMoney.com staff writer Ben Rooney contributed to this report.