Oil tumbles on weak economic reports

Dour economic indicators send crude prices sinking, as traders shift focus from supply weakness and a falling dollar.

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By David Goldman, CNNMoney.com staff writer

The smallest car I would drive to save gas is:
  • An SUV
  • A sedan
  • A Smart car
  • A golf cart

NEW YORK (CNNMoney.com) -- The battered U.S. economy brought an oil rally to a halt Thursday, overshadowing a falling dollar and supply concerns.

Light, sweet crude oil for September delivery fell $2.69 to settle at $124.08 on the New York Mercantile Exchange.

Oil fell as Thursday's economic data came in much weaker than forecast.

U.S. gross domestic product got a boost from $90 billion in stimulus checks in the previous quarter, the government reported Thursday. But the economy - which grew at a 1.9% annual rate from April through June - did not grow as strongly as economists had expected.

Furthermore, initial jobless claims rose to their highest level in five years last week, the Department of Labor reported Thursday.

"We're dealing with a weak economy," said Ann-Louise Hittle, an oil analyst with Wood Mackenzie. "When GDP growth is weak, demand tends to be weaker as well."

Oil rose by more than $1 earlier in the day on renewed dollar weakness.

Like all dollar-traded commodities, oil prices tend to rise when the U.S. currency sinks. A weak U.S. dollar makes oil cheaper for foreign nations. Furthermore, some investors inevitably use the commodity as a hedge against inflation when the dollar falls.

But as traders absorbed the dour economic reports, they sold off oil on new-found demand concerns.

Supply concerns abate: Oil prices rallied $4.58 a barrel Wednesday after a surprise decline in the nation's gasoline stockpile.

A weekly supply report from the U.S. Energy Information Administration showed a 3.5-million barrel decrease in gasoline supplies, and a decline of 100,000 barrels of crude oil in the week ended July 25. That countered investor sentiment that U.S. demand was falling.

But analysts say it's too early to declare the oil market bullish again.

"So far, the stronger demand data that came out was only for one week," said Hittle. "For the year, U.S. demand has been very week, with very large drops in the previous weeks."

Despite Wednesday's large run-up, oil was still trading $23 below it's record of $147.27 set July 11.

"The bears were away for a very long time but now they're back in control," said Stephen Schork, editor of energy industry newsletter The Schork Report. "This market has plunged, and is heading down to the $110 level and maybe double digits by the end of the year."

Gas prices: The price of regular unleaded gas at the pump slipped 1.5 cents to $3.926 a gallon on average, a level not seen since late May, according to a nationwide survey from motorist advocacy group AAA.

That marks the 13th straight day of declines for gas prices. Still, it may not be enough for gasoline demand to trend upwards for an extended time.

"Prices are still up very strongly year-over-year, which hurts overall demand." Hittle said.  To top of page

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