Oil falls after drop in U.S. fuel demand

By Richard Valdmanis

NEW YORK (Reuters) - Oil fell by more than $1 on Thursday as concerns over weak demand in a softening U.S. economy outweighed an unexpected drop in U.S. crude oil inventories and continued production problems in the wake of Hurricane Gustav.

U.S. crude fell $1.46 to $107.89 a barrel, extending a slide from the all-time peak in mid-July of over $147. London Brent crude fell $1.76 to $106.30.

"I've got to believe that the market, in its wisdom, is looking at other factors and is preoccupied with the state of the economy, declining demand and a strengthening dollar," said Peter Beutel, president of Cameron Hanover, New Canaan, Connecticut.

U.S. government inventory data showed total demand for oil products, such as gasoline and distillates, over the past four weeks fell 3.5 percent from a year ago, continuing a trend of weak consumption in the midst of an economic downturn. <EIA/S>

The U.S. dollar's further rebound encouraged oil's losses by weakening the spending power of buyers using other currencies, dealers said.

The oil market shrugged off a government report showing crude U.S. oil inventories fell 1.9 million barrels last week, compared with a forecast of a 200,000 barrel increase.

Those inventories are likely to keep sliding in coming weeks as the U.S. energy sector makes slow progress in its recovery from Hurricane Gustav, with some 25 percent of U.S. crude oil production still shut in the storm's wake.

Production shutdowns in the Gulf of Mexico already have cut 7.4 million barrels of cumulative output, about a third of the amount of oil the United States consumes in a day, according to government data.