OIL prices briefly dropped below US$118 a barrel yesterday, US$30 below their record high , after a jump in US crude and other fuel stockpiles fed beliefs that high energy prices are eating into demand.

Light, sweet crude for September delivery finished the session down 59 cents at US$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 US$117.11, a US$30, or 20 percent, drop from their trading high of US$147.27, reached July 11. Some investors believe a 20 percent pullback signals the beginning of a bear market.

In London, September Brent crude fell 70 cents to settle at US$117 a barrel

At the pump, falling crude kept weighing on prices. US filling stations hungry for business ratcheted down the price for a gallon of regular on average by another penny overnight to US$3.862 (US$1.01 a liter), 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 US$4 a gallon (US$1.05 a liter) reached July 17.

Oil market traders are paying close attention to see if oil falls below US$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 US$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, New Jersey. '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 US 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 US$100 a barrel.



The US 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 US 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 (3.8 liters) before we really see any change in driving habits,' Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Illinois.

Lending support to that idea, the EIA said demand for gasoline for the month ended Aug. 1 topped out at about 9.4 million barrels a day, 2.3 percent lower than the same period last year.

Investors again shrugged off tension over Iran's nuclear program. Six nations, including the US, agreed Wednesday to seek new U.N. sanctions against Iran after it failed to accept incentives aimed at defusing the dispute over its nuclear program.

The countries agreed that Iran's latest reply to the offer was 'very disappointing' and 'a stalling tactic' that left them no choice but to pursue sanctions against the oil-producing country, State Department spokesman Gonzalo Gallegos said.



The market also ignored a fire at a Turkish section of the Baku-Tbilisi-Ceyhan pipeline, a major supplier of crude to Western markets. The blaze disrupted the flow oil but did not halt shipments, said Murat Lecompte, a spokesman for pipeline shareholder BP PLC. The pipeline can pump slightly more than 1 million barrels of crude oil per day. The cause of the fire was unclear.

Investors appear to be reacting less to potentially bullish factors like the weather and geopolitical developments and instead are turning their attention more to fundamentals, 'in particular the rocky demand outlook in certain countries,' said analysts at JBC Energy in Vienna, Austria.

In other Nymex trading, heating oil futures fell 4.41 cents to settle at US$3.2379 a gallon, while gasoline prices fell 0.71 cent to settle at US$2.9493 a gallon. Natural gas futures rose 4.7 cents to settle at US$8.773 per 1,000 cubic feet.