Oil off more than $3; CFTC cites demand for run-up

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The sell-off was a throwback to last week's sharp declines, and dragged crude to its lowest level since early June. It was oil's fifth decline in the last sixth sessions.

Light, sweet crude for August delivery fell $3.09 to settle at $127.95 a barrel in its last trading day on the New York Mercantile Exchange. Earlier the contract, which will be replaced by September crude Wednesday, dropped as low as $125.63.

The drop offered further evidence that investors who only a week and a half ago drove prices to a new high above $147 a barrel are now quickly pulling money out of the market. It was also a reminder that, with traders for the moment turning bearish, the absence of major news can push the market down just as incremental supply concerns previously drove prices sharply higher.

"This is more of the long exit from the market by the hedge funds," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates. "A lot of these investors who have been supporting prices are hitting the road."

In Washington, the Senate voted 94-0 to move ahead with a plan that would require the Commodity Futures Trading Commission to set limits on trading in oil markets by certain large investors.

A number of Democratic lawmakers and other critics have blamed the historic rise in prices on speculators that they suggest are manipulating prices.

However, a federal task force said in an interim report that fundamental supply-and-demand factors are most likely to blame for the sharp run-up in oil prices. The Interagency Task Force on Commodity Markets played down the role of speculators, saying its preliminary analysis "does not support the proposition that speculative activity has systematically driven changes in oil prices."

Oil prices rose Monday partly on fears that Tropical Storm Dolly could threaten oil and gas installations in the Gulf of Mexico.

That threat had largely subsided by Tuesday, however. Forecasters said Dolly was expected to make land in the vicinity of the Rio Grande late Tuesday or early Wednesday as a hurricane with sustained winds of 74 to 95 mph.

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