Oil slips below $126 after rising a day earlier

[July 31, 2008]  AMSTERDAM, Netherlands (AP) -- Oil prices fell below $126 a barrel Thursday after jumping more than $4 in the previous session after a U.S. agency reported America's gasoline inventory unexpectedly fell last week and as Iran vowed to continue its nuclear program.

By midday in Europe, light, sweet crude for September delivery was down 94 cents to $125.80 a barrel in electronic trading on the New York Mercantile Exchange. The contract soared $4.58 to settle at $126.77 a barrel on Wednesday.

Wednesday's large increase came amid very low trading volumes for the Nymex contract and may be showing a distorted reflection of the market, analysts said.

"The current low liquidity is making it hard to be fully confident about the sustainability of the rebound seen (Wednesday)," said Olivier Jakob of Petromatrix in Switzerland. "Overall U.S. demand is still a bearish concern."

Crude has fallen over the last three weeks from a record high of $147.27 on July 11, in part, on expectations that the spike in prices over the last year has begun to dampen U.S. demand for gasoline.

But the Energy Information Administration said Wednesday in its weekly inventory report that U.S. gasoline supplies fell 3.5 million barrels last week. Analysts surveyed by energy research firm Platts expected gasoline supplies to increase by 400,000 barrels.

Gasoline stocks had risen in three previous three weeks.

"That weekly data series is very useful, but very erratic week to week," Moore said. "I hesitate to read too much into the stocks decline."

Only days remain until a deadline expires for Tehran to show it will stop expanding its uranium enrichment program, at least temporarily, or face the threat of new U.N. sanctions.

But there were no signs Wednesday that Tehran was willing to bend as Iranian officials, including supreme leader Ayatollah Ali Khamenei, pledged to continue the country's nuclear program.

"We are not giving up our nuclear activities, including enrichment," said Ali Ashgar Soltanieh, Iran's top representative to the International Atomic Energy Agency.

Also Wednesday, more than 100 nonaligned nations backed Iran's right to peaceful uses of nuclear power.

"It's quite likely that tensions around Iran's nuclear program will again become an issue for the market," said David Moore, a commodity strategist with Commonwealth Bank of Australia in Sydney. "The deadline for Iran to respond is ticking away."

In other Nymex trading, heating oil futures fell 0.13 cents to $3.519 a gallon while gasoline prices were down 2.01 cents to $3.1150 a gallon. Natural gas futures rose 0.4 cent to $9.252 per 1,000 cubic feet.

In London, September Brent crude was down 81 cents at $126.29 a barrel on the ICE Futures exchange.

[Associated Press; By PABLO GORONDI]

Associated Press writer Alex Kennedy in Singapore contributed to this report.

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