Oil falls below $68 despite tightening supplies

Oil prices fell for a third straight day Wednesday, dipping below $68 a barrel despite an Energy Department report showing a drop in crude and gasoline supplies that suggests demand may be recovering.

Benchmark crude for October delivery fell 12 cents to $67.93 a barrel on the New York Mercantile Exchange. The contract lost $1.91 on Tuesday to settle at $68.05.
Oil and gasoline in storage is much greater than usual right now, partly because it has been a dismal travel season. It's one of the biggest reasons why you won't pay a lot to fill your tank if you travel this Labor Day.

The average price for a gallon of regular gasoline fell a half penny overnight to $2.602, according to auto club AAA, Wright Express and Oil Price Information Service. That's about 5 cents more than a month ago, but about $1.08 less than at this time last year.
Gasoline inventories fell by 3 million barrels to 205.1 million barrels, the Energy Department said, a steeper decline than analysts had expected.

Oil analyst and trader Stephen Schork had expected a large gasoline draw given the lateness of this year's Labor Day holiday.

Gasoline supplies have increased by 2 percent since Memorial Day, while a typical driving season at this point would show a draw of around of 4.6 percent.

"A build in gasoline supplies through the summer driving season has only occurred once (2004) over the last 20 years for which the DOE provides data," Schork wrote in his morning report.
Oil had been trading higher overnight after the American Petroleum Institute said late Tuesday that U.S. inventories fell by 3.2 million barrels last week. Refiners voluntarily report the API numbers, while the Energy Department reports mandatory supply figures.

But crude prices slipped just ahead of the Energy Department report, as new figures from the Labor Department showed companies earlier this year slashed spending on everything, including energy. The morning crude inventories report boosted prices above $68, but the rally couldn't hold.

Oil sank almost $5 a barrel in the first two days of the week on worries that a global economic recovery this year would be slow and may not justify the big rallies in stocks and commodities since March.

U.S. stock indexes fell about 2 percent Tuesday, largely on rumors of a major bank failure.
On Wednesday, both the energy and equity markets were weighing mixed signs about whether that the U.S. economy -- the biggest consumer of oil -- is improving.

The ADP National Employment Report said employment fell by 298,000 in August, the smallest drop since September 2008, though ADP said employment is likely to decline for at least several more months.

The Institute for Supply Management, a trade group of purchasing executives, said its manufacturing index rose in August, indicating an expansion for the first time since January 2008. And the National Association of Realtors said pending U.S. home sales rose to the highest level in more than two years.

In other Nymex trading, gasoline for October delivery gained 1.4 cents to $1.7966 a gallon and heating oil lost 1.2 cents to $1.7467 a gallon. Natural gas fell 5.1 cents to $2.77 per 1,000 cubic feet.

In London, Brent crude was down 17 cents at $67.56.
Associated Press Writers Alex Kennedy in Singapore and Carlo Piovano in London contributed to this report.