Oil prices fell sharply on Monday in what traders described as a wave of profit-taking sparked by a steep decline in gasoline futures.

November crude futures plunged $1.26, or 2 percent, to settle at $53.67 per barrel on the New York Mercantile Exchange (search). November gasoline futures sank 5.9 cents, or 4 percent, to $1.3504 per gallon.

Ed Silliere, vice president of risk management at Energy Merchant in New York, attributed the downward momentum to profit taking, which began after oil prices briefly surpassed $55 a barrel, as well as to signs of lower demand for gasoline.

"It's more than the normal seasonal dropoff in demand," Silliere said, "and we think it's price related."

The Energy Department (search) reported last week that the average daily demand for gasoline for the four weeks ending Oct. 8 was 8.94 million barrels, down 0.4 percent from the same period a year earlier.

Meantime, the average retail price of gasoline nationwide is slightly above $2 a gallon, just a nickel below the May peak, according to the Oil Price Information Service (search), a Lakewood, N.J. provider of industry data.

Crude oil prices are the highest in a generation, rising by nearly 80 percent from the beginning of the year. However, even at current levels, crude oil prices are still about $27 below the all-time highs — in inflation-adjusted terms — of February 1981.

Prices have skyrocketed about $10 in the past month, primarily over production delays in the Gulf of Mexico, where Hurricane Ivan hit mid-September.

Declines in U.S. inventories of heating oil, diesel and jet fuel just before the Northern Hemisphere winter are the latest in a line of supply factors to rattle the market.

The Energy Department said in its weekly petroleum supply report last week that commercially available supplies of heating oil declined by 1.2 million barrels for the week ending Oct. 8, falling to 50.0 million barrels, or 10 percent below year-ago levels.

But given today's soaring price of heating oil, Silliere said he expects the industry to begin cranking out large amounts of fuel. Once refiners perform seasonal maintenance "they're going to make nothing but heating oil."

Heating oil prices fell 2.11 cents to $1.5403 a gallon Monday on Nymex.

Others remain concerned about winter fuels. "We are heading for winter and stocks in the U.S., Europe and Japan are significantly lower than they were a year ago," said, Axel Busch, the chief correspondent for Energy Intelligence Group in London. "If we get a cold snap, or a cold winter, we will see prices go higher."

In the Gulf of Mexico, over 20 million barrels of crude remain shut in as recovery efforts continue to get production levels back to normal, the U.S. federal Minerals Management Service said on its Web site.

But with the amount of excess capacity — immediate surplus supply — at about 1 percent of daily demand, now estimated to be above 82 million barrels, any supply outage is expected to factor into prices.

Market players have been fixated on potential disruptions in production, such as the just-concluded oil workers' strike and threats of rebel attacks in Nigeria, Africa's largest producer, and sporadic attacks by militants on Iraqi pipelines.

Unrest in the world's largest producer, Saudi Arabia; the tax battle between the Russian government and oil giant Yukos; and political tensions in key producer Venezuela have also weighed in recently.

In other developments, Chicago Board of Trade (search) chief executive Bernard Dan told Australia's Nine Network that the U.S. economy would be hurt by the spike — but not significantly. He said the economy could even withstand prices of $75 per barrel. "While it might do some damage in terms of the economy and might be reflected in our equity market, I don't think it is going to be at a level where it is catastrophic in any sense," Dan said.

His comments came after U.S. Federal Reserve Chairman Alan Greenspan said Friday rising oil prices would have far less impact than the oil shocks of the 1970s.