Oil Prices Drop Under $69 on Higher Gasoline Supplies

Oil prices fell below $69 a barrel Wednesday after U.S. government data showed the domestic supply of gasoline rising for the third straight week amid stagnating demand.

"Perhaps the higher prices are having an effect on demand," said BNP Paribas Commodity Futures broker Tom Bentz.

Lending to the weakness in oil prices was a monthly report from OPEC, which slightly reduced its demand forecast for 2006 and predicted that the world's crude-oil supply cushion would rise significantly by the end of the year.

Click here to visit FOXBusiness.com's Energy page.

But oil prices are still about 40 percent higher than a year ago amid persistent market anxieties about the West's nuclear standoff with Iran, supply disruptions in Nigeria and the upcoming Gulf of Mexico hurricane season.

After dipping as low as $68.20 a barrel, light sweet crude for June delivery settled at $68.69, a decrease of 84 cents on the New York Mercantile Exchange. Gasoline futures slipped by 5.1 cents to settle at $1.9751 a gallon, while heating oil futures declined by 3.03 cents to close at $1.9212 a gallon.

In London, July Brent crude futures settled $1.04 lower at $69.04 a barrel on the ICE Futures exchange.

In its weekly petroleum report, the Department of Energy said domestic gasoline supplies grew by 1.3 million barrels last week to 206.4 million barrels. While that is 3.5 percent below year-ago levels, it comes at a time when gasoline consumption appears to be flattening out as a result of high prices.

The Energy Department said gasoline demand over the past four weeks was 9.2 million barrels per day, or about even with the same period last year. The average retail price of gasoline nationwide is $2.95 a gallon, or 78 cents higher than a year ago.

Other data showed crude oil inventories slipping by 100,000 barrels last week to 346.9 million barrels, or 4.7 percent higher than last year, and distillate fuel stocks also falling by 100,000 barrels to 114.6 million barrels, or 7 percent higher than last year.

Also on Wednesday, the Organization of Petroleum Exporting Countries cut its forecast for 2006 world oil demand to 84.6 million barrels per day, a drop of 60,000 barrels a day from its previous estimate. OPEC explained in its monthly report that the revision was due to warmer weather in the U.S. and high gasoline prices, which appear to have curbed some demand.

OPEC also sought to dampen concerns about its surplus production capacity. When this excess capacity is tight, it makes oil traders extra jittery about any real or potential threats to supply. From the end of 2002 to the end of 2005, OPEC said its spare production capacity declined from 5 million barrels per day to 2 million barrels per day. But the cartel said that figure would rise to 3 million barrels per day, or 3.5 percent of global demand, by the end of this year, thanks to the combined effects of weakening demand growth and new projects coming on line.

Despite OPEC's claims, many analysts point out that the bulk of this excess capacity resides in Saudi Arabia and is not the high-quality crude oil that is preferred by refiners.

Moreover, the market remains fixated on geopolitical factors that are beyond the control of OPEC, such as violence in Nigeria and the diplomatic dispute between the West and Iran over Tehran's nuclear ambitions.

On Wednesday, Iran's president cast scorn on a proposal made by European diplomats, who said they may add a light-water reactor to a package of incentives meant to persuade Tehran to permanently give up uranium enrichment — or face the threat of U.N. Security Council sanctions.

"Do you think you are dealing with a 4-year-old child to whom you can give some walnuts and chocolates and get gold from him?" Mahmoud Ahmadinejad said Wednesday. Ahmadinejad said Iran "won't accept any suspension or end" to its uranium enrichment activities.

Oil prices have also been bolstered on concerns about the approaching hurricane season. Last year's hurricanes Katrina and Rita devastated oil and natural gas production in the Gulf of Mexico and more than 300,000 barrels per day of output remains shut.

In other Nymex trading, natural gas futures fell 12.3 cents to settle at $6.129 per 1,000 cubic feet, the lowest close since May 26, when futures settled at $6.12.

Click here to visit FOXBusiness.com's Energy page.