Oil falls to almost $124 a barrel

NEW YORK -- Oil prices pulled back Thursday, wiping out some gains from the previous day's $4 a barrel rally, as traders bet that a cooling U.S. economy will continue to eat into U.S. demand for fuel.

At the pump, easing prices underscored Americans' waning consumption of gasoline. The average price of a gallon of regular slipped 1.7 cents to $3.909, according to auto club AAA, the Oil Price Information Service and Wright Express.

Light, sweet crude for September delivery fell $2.69 to settle at $124.08 a barrel on the New York Mercantile Exchange, a day after the contract soared more than $4 in the biggest one-day jump in two weeks. Prices have now fallen in four of the last seven sessions and are 14 percent off their all-time trading high above $147, reached July 11.

A Labor Department report said the number of people seeking jobless benefits rose to the highest level in five years. Economists warned the weekly figures can be volatile, and some dismissed them as an aberration, however.

Still, the poor readings rekindled fears of a recession, prompting energy traders to dump oil contracts on expectations that more belt-tightening lay ahead for Americans who are already skipping vacations, giving up gas-gazzling sport utility vehicles and cutting back on driving to cope with almost $4-a-gallon gasoline.

"When you order grounding of planes and people are making significant driving changes in the U.S. because the price of food and gasoline has doubled, that's very bearish [for oil prices] moving forward," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.

Given those circumstances, "$124 a barrel oil is still too expensive," Cordier said, adding that he expects prices to fall to $110 in coming months.

Prices were also pressured Wednesday as traders cashed in profits from Wednesday's rally. Prices surged $4.58 on Wednesday to settle at $126.77 after the government reported a surprise drop in U.S. gasoline supplies.

"People looked at yesterday's frenzied rally and realized the fundamentals weren't there to support it," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

Some analysts attributed Wednesday's spike to low trading volume in oil markets, which can increase volatility. Speculative traders, particular large investment funds, have been liquidating oil positions in recent months and are now shorting crude contracts, or betting that prices will fall, for the first time in 17 months.

"We're seeing a lower volume trade because this bull market seems to be over at least for the time being," Ritterbusch said.

Crude has fallen over the last three weeks from a record high of $147.27 on July 11, in part, on expectations that the spike in prices over the last year has begun to dampen U.S. demand for gasoline.

The drop in demand has been felt overseas as well. China has been consuming less energy since imposing restrictions on driving and closing some factories in an effort to reduce pollution ahead of next month's Beijing Olympics, said Cordier of Liberty Trading Group.

"Even when those factories reopen, I think we've crossed a threshold where the speculative money isn't coming back into the oil market for the rest of 2008," he said.

In other Nymex trading, heating oil futures fell 8.16 cents to settle at $3.4387 a gallon while gasoline prices lost 8.71 cents to settle at $3.048 a gallon. Trading of gasoline and heating oil was more volatile than normal because both contracts expired at the end of the day.

Also Thursday, the Energy Department's Energy Information Administration said in its weekly report that natural gas in storage in the U.S. rose last week but is 0.5 percent below the five-year average for this time of year.

Natural gas futures shed 12.9 cents to settle at $9.119 per 1,000 cubic feet.

In London, September Brent crude fell $3.12 to settle at $123.98 a barrel on the ICE Futures exchange.

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Associated Press writers Pablo Gorondi in Budapest, Hungary, Alex Kennedy in Singapore and Tim Paradis in New York contributed to this report.