Oil tumbles on supply report, dollar concerns

NEW YORK - Oil prices fell sharply Thursday after the Energy Department reported unexpected declines in crude oil supplies last week but said the drop was due to temporary delays in unloading oil tankers along the Gulf Coast.

The decline of more than $4 came as a stronger dollar and concerns about gas demand also weighed on prices.

Retail gas prices, meanwhile, rose to a new record above $3.95 a gallon.

Light, sweet crude for July delivery fell $4.41 to settle at $126.62 a barrel on the New York Mercantile Exchange. It was the lowest settlement in two weeks and the biggest single-day price drop since March 19.

In Washington, meanwhile, the Commodity Futures Trading Commission revealed that it is six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation. The CFTC also announced a handful of initiatives designed to increase transparency of the energy futures markets.

The commission said it started the probe in December and was publicizing the investigation "because of today's unprecedented market conditions."

Disclosure of the investigation may have contributed to oil's declines, analysts said.

"That's regulation that could change the landscape of what people have gotten used to," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.

After Thursday's inventory report, prices initially strengthened, then fell. The ambivalent reaction partly reflects a deeper battle between investors who believe prices have risen far beyond levels that can be justified by underlying supply and demand fundamentals and those who believe speculative money will continue flowing into oil futures, sending prices higher regardless of the market's fundamentals.

"You're seeing some big funds in there throwing money around on both sides of the market," said Jim Ritterbusch, president of Ritterbusch and Associates in Galena, Ill.

But the magnitude of the day's price decline suggested to some analysts that the bullish momentum that pushed prices over $135 as recently as one week ago may be running out of steam.

"This was the first time we've had a bearish reaction," to news that in the past would surely have driven prices higher, Cordier said.

In its weekly inventory report, the department's Energy Information Administration said crude oil inventories fell 8.8 million barrels last week, while gasoline supplies fell 3.2 million barrels. Analysts surveyed by energy research firm Platts had expected slight increases in supplies of both.

But the EIA also offered a rare explanatory note on the Gulf Coast tanker problems. Gulf ports have closed many times in recent months due to fog, said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

Also putting some weight on prices were supplies of distillates, including heating oil and diesel fuel, which rose 1.6 million barrels last week, double what analysts had expected. July heating oil futures plummeted 13.58 cents to settle at $3.6885 a gallon on that news.

The surprise drop in gasoline supplies propelled June gas futures to a new trading record of $3.52 a gallon on the Nymex. But gas later retreated, following the rest of the complex, to settle down 4.34 cents at $3.4042 a gallon.

At the pump, meanwhile, the average national price of a gallon of gas rose 0.8 cent Thursday to a record $3.952, according to a survey of stations by AAA and the Oil Price Information Service.