Oil prices close below $119 after inventory report

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Light, sweet crude for September delivery finished the session down 59 cents at $118.58 a barrel on the New York Mercantile Exchange. It was crude's lowest settlement price since May 2; prices earlier fell as low as $117.11, a $30, or 20 percent, drop from their trading high of $147.27, reached July 11. Some investors believe a 20 percent pullback signals the beginning of a bear market.

At the pump, falling crude kept weighing on prices. U.S. filling stations hungry for business ratcheted down the price for a gallon of regular on average by another penny overnight to $3.862, according to auto club AAA, Oil Price Information Service and Wright Express. Prices have now fallen more than 6 percent from all-time highs above $4 a gallon reached July 17.

Oil market traders are paying close attention to see if oil falls below $117, a key resistance level expected to trigger a rash of technical selling by computers programmed to dump oil contracts once prices fall below a certain threshold.

"There's a line in the sand just below $117. If you close below that, it signals traders are giving up on the bull market in oil," said Tom Kloza, publisher and chief oil analyst of the Oil Price Information Service in Wall, N.J. "Subsequent rallies may take us higher, but the highs for the year have probably been put in."

Still, Kloza said a surprise event such as a flare-up of violence in the Middle East or a major hurricane slamming the U.S. Gulf coast, could send prices soaring again. Other analysts say oil remains in a long-term upward trend, noting that futures contracts years out still peg prices above $100 a barrel.

The U.S. Energy Department's Energy Information Administration said crude supplies rose by 1.7 million barrels to 296.9 million for the week ended Aug. 1, slightly more than the 1.2 million-barrel increase expected by analysts surveyed by energy research firm Platts. The EIA said inventories of distillate fuel, which include diesel and heating oil, jumped 2.8 million barrels to 133.3 million barrels, above the 2.3 million barrels expected by analysts.

Meanwhile, EIA data showed gasoline stockpiles fell by 4.4 million barrels to 209.2 million barrels for the week ended Aug. 1, much more than the 1.4 million drop expected by analysts.

The government figures reflect the fuel that refiners have on hand. The big drop in gas stocks surprised some oil market traders, but analysts said it likely signals that gas distributors have taken more deliveries from the refiners as the summer driving season enters its last month not that U.S. motorists are suddenly ramping up their driving amid recent pullbacks in pump prices.

"I think we need to drop another 30 or 40 cents a gallon before we really see any change in driving habits," Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill.

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