Oil prices fell to below $81 a barrel Wednesday as the dollar gained strength and a government report showed that crude supplies rose more than expected.
Benchmark crude fell $2.03 to $80.71 a barrel on the New York Mercantile Exchange, the second day of sharp declines. The June contract fell $3.45, or 4 percent, to settle at $82.74 on Tuesday and prices almost dipped below $79 at one point Wednesday.
The dollar keeps gaining on the euro, which fell to a 13-month low against the dollar Tuesday. Because oil is bought and sold in dollars, the two often move in the opposite direction. The value of the dollar dictates how much oil investors can afford.
But there are also signs that demand for energy is as great as some had thought, which sank prices as well.
The Energy Information Administration said Wednesday that crude inventories rose by 2.8 million barrels last week. Analysts expected an increase of only 1.5 million barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.
And inventories of gasoline and distillates are rising as refineries step up production.
"The fact that refiners are processing as much crude as possible and still ending up with barrels going into storage is an especially bearish situation," said energy consultancy Cameron Hanover. "We have not seen anything like this since late 1985, just before prices collapsed."
While U.S. supplies remain high and demand weak, analysts said falling oil prices are more likely a result of speculative transactions and worry about European debt problems than a reaction to market fundamentals.
At the pump, the national average price for a gallon of regular gas rose 2 cents to $2.92, according to AAA, Wright Express and Oil Price Information Service. Retail gas prices are up 5 cents from a week ago and up 94 cents from a year ago.
Gasoline futures prices dropped substantially Tuesday, down about 11.3 cents. That's the biggest drop since Sept. 1, when prices fell about 20.4 cents. Cameron Hanover thinks "this could be the start of a bigger decline in prices.
In Wednesday Nymex trading gasoline lost 6.02 cents at $2.2620 per gallon, and heating oil gave up 5.16 cents at $2.2079 a gallon. Natural gas fell 6.6 cents to $3.947 per 1,000 cubic feet.
In London, Brent crude was down $1.80 at $83.87 on the ICE futures exchange.
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