04/17/2013 09:47 EDT | Updated 06/17/2013 05:12 EDT

Oil falls 2 per cent as weak US fuel demand adds to economic growth worries

NEW YORK, N.Y. - Oil dove again Wednesday, the latest in a series of declines that has pushed the price down by US$10 a barrel over two weeks.

This time, it was an Energy Department report that suggested more drivers are staying home, giving them no reason to fill up their tanks.

That actually works to the benefit of those who are hitting the gas station. The average price of gas has dropped 11 cents since April 1 and could fall further.

Oil dropped US$2.04, or 2.3 per cent, to close at US$86.68 in New York. Brent crude, which is used to price oil used by many U.S. refiners, dropped US$2.22, or 2.2 per cent, to US$97.69, the lowest level since July.

Fundamentally, there's been little support for oil prices. Forecasts for global oil demand have fallen at a time of ample supplies. Economic reports from the U.S., China and Europe have been disappointing. Wednesday was the fourth drop of at least 2 per cent in April.

U.S demand for gasoline during the four weeks ended April 12 was 3.3 per cent less than a year earlier, averaging 8.4 million barrels a day, according to the Energy Department. That's the lowest demand for the second week in April since 1997, according to Tom Kloza, Chief Oil Analyst at Demand for other fuels, such as diesel and heating oil, was also tepid.

"This is a serious slump," Kloza said.

Meanwhile, U.S. gasoline supplies are 3.6 per cent higher than they were a year ago, according to the Energy Department.

Lower gasoline demand and lower oil prices have led to lower gasoline prices for U.S. drivers. The average U.S. retail gasoline price is now $3.52 per gallon, according to OPIS, AAA and Wright Express. Prices have declined steadily since late February, when the average price hit a high for the year of US$3.79 per gallon (3.79 litres).

The drop in pump prices may continue. Gasoline futures fell 5 cents, or 1.7 per cent, to $2.73 per gallon (3.79 litres) Wednesday. Futures prices help set the price that distributors and station owners pay for wholesale gasoline. Those wholesale prices are then used to determine retail prices.

The surprise drop in gasoline demand followed a series of weak economic reports around the world, starting with a disappointing U.S. employment report two weeks ago. This week, a report of slower-than-expected economic growth in China helped trigger a broad sell-off in commodities that included the biggest one-day drop in the price of gold in 30 years.

The prospects for a recovery in Europe remain dim. On Tuesday, the International Monetary Fund said it expects the combined economy of the 17 eurozone countries to shrink 0.3 per cent in 2013. The IMF also lowered its outlook for world economic growth this year to 3.3 per cent from its January forecast of 3.5 per cent. It predicts U.S. economic growth of 1.9 per cent this year, down from a January estimate of 2.1 per cent.

When economic growth slows, drivers, shippers and travellers consume less gasoline, diesel and jet fuel.

In other futures trading on the New York Mercantile Exchange:

— Heating oil fell 7 cents to US$2.73 a gallon (3.79 litres).

— Natural gas rose 5 cents to US$4.21 per 1,000 cubic feet.


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