ENERGY market investors managed to win back modest gains yesterday following oil's big drop a day earlier, but they again drove natural gas prices sharply lower as a three-week sell-off of that fuel continued unabated.

Light, sweet crude for September delivery rose US$1.05 to settle at US$125.49 a barrel on the New York Mercantile Exchange, gaining back only about a quarter of Wednesday's decline. August natural gas tumbled 46.5 cents to settle at US$9.283 per 1,000 cubic feet, its lowest point since March.

In London, Brent crude for September delivery rose US$1.15 to settle at US$126.44 a barrel on the ICE Futures exchange.

The day's gains followed a sharp drop on Wednesday, when oil tumbled US$3.98 to settle at US$124.44 a barrel, its lowest finish since June 4. Crude has fallen in six of the past eight sessions, and now sits nearly 15 percent below its peak above US$147 a barrel earlier this month.

In overnight trading, oil rose as high as US$126.01 as some investors tried to see if the market had reached a bottom and could rebound. But the gains couldn't hold amid a growing belief that falling demand does not justify the recent high price.

Americans used 2.4 percent less fuel over the past four weeks than they did last year, the latest figures by the Energy Department's Energy Information Administration show. While that may not sound like much, industry experts say it represents a significant shift by the world's largest energy consumer. A bigger-than-expected increase in gasoline supplies only added to concerns that drivers are cutting back.

'We've grounded airplanes. People are driving less, they're trading in their SUVs,' said James Cordier, president of Tampa, Florida-based trading firms Liberty Trading Group and OptionSellers.com. 'For the foreseeable future , at least for the next 6 to 12 months , we have demand destruction.'



Cordier predicted prices could yet drop further, with oil possibly falling as low as US$110 a barrel by September.

'People have changed their driving habits, and they're not going to change back anytime soon,' he said.

A modestly stronger dollar helped keep prices in check Thursday, by discouraging traders who had been buying commodities as a hedge against inflation and a softer greenback.

'More than any other factor, a strong dollar would help take the air out of this market,' editors at energy consultancy Cameron Hanover noted in their daily market commentary.

Investors remained on guard over a threat by Nigeria's main militant group Wednesday to destroy major pipelines in the oil exporting country within 30 days. The threat, which only weeks ago might have caused oil prices to spike, did little to push crude higher, however.

'We can only suggest that the market, finally weighed down by the specter of decreasing energy demand, may not be as responsive to geopolitical headlines as it once was,' MF Global analyst Edward Meir wrote in a research note.

Natural gas fell after the Energy Department's Energy Information Administration said in its weekly report that natural-gas inventories held in underground storage in the lower 48 states rose by 84 billion cubic feet to nearly 2.4 trillion cubic feet last week.

Investors hoping for an uptick in demand, and a reason to stop the fossil fuel's sharp decline, were looking for signs of a slower build. However, the Energy Department figure came in at the high end of a forecast range of 79 billion to 84 billion cubic feet provided by analysts surveyed by the energy research firm Platts.

In other Nymex trading, heating oil futures 1.7 cent to settle at US$3.5671 a gallon while gasoline futures rose 2.5 cents to settle at US$3.0594 a gallon.

In London, Brent crude for September delivery rose US$1.15 to settle at US$126.44 a barrel on the ICE Futures exchange in London.