Oil Prices Keep Dropping On Demand Worries

Oil traders sent crude prices tumbling as low as $118 a barrel Tuesday on the growing belief that a U.S. economic slowdown and high energy costs are curbing consumer demand for gasoline and other petroleum products.

Crude oil finished the day just above $119 a barrel - its lowest settlement price since early May. Oil has now fallen nearly 20 percent in less than a month, reports CBS News correspondent Anthony Mason.

A day after plunging as much as $5 a barrel in a dramatic sell-off, crude continued its downward trend. Gasoline and heating oil prices also fell, while natural gas ended unchanged after Monday's steep drop.

Light, sweet crude for September delivery fell $2.24 to settle at $119.17 a barrel on the New York Mercantile Exchange, the lowest close since May 2. During trading, the contract dipped to $118 - nearly $30 below the trading high of $147.27 reached July 11.

In London, September Brent crude fell $2.98 to settle at $117.70 a barrel.

"The market psychology has finally shifted," said Stephen Schork, an analyst and trader in Villanova, Pennsylvania, adding that "$4-a-gallon gasoline has clearly killed demand."

Americans drove nearly ten billion fewer miles this May than they did in May of last year, Mason reports. For 15 straight weeks now we've pumped less gasoline than we did a year ago.

In Howard County, Md., the police department has just ordered its officers to cut their driving by 5 percent.

"Just like people tightening their belts, their families, with the economy, with gas prices the county government's got to do the same thing," Howard County executive Ken Uhlman told Mason.

After hitting a high of $4.11 a gallon in July, gas has fallen nearly a quarter in less than 3 weeks, reports Mason. That could accelerate, says trader Phil Flynn, now that the psychology in the oil market has made a u-turn.

"We could see a freefall. We could see this market fall as fast as it rose. Maybe even faster. So if we keep our fingers crossed, maybe we'll be talking about $3 gasoline again. And we could be talking about $90 crude," Flynn said.

But some analysts say oil has the potential to jump back up.

There are many factors that could keep oil from descending further, said Mike Fitzpatrick, vice president of energy and risk management at MF Global LLC. Those include political tensions in Nigeria and the Middle East, the potential for a big hurricane along the Gulf Coast, and global demand that is still growing - just not at the same pace that it had been.

"Even if it seems as though China's economic demand run has slowed some, those changes at the margins still make them a huge consumer of crude products," Fitzpatrick said.

Still, the Federal Reserve, which issued an economic assessment statement along with its decision to keep interest rates stable, said that along with tight credit and the housing contraction, "elevated energy prices are likely to weigh on economic growth over the next few quarters."

The dollar's six-week highs against the euro also contributed to oil's decline Tuesday. The euro fell to $1.5464 from the $1.5587 it bought late in New York trading Monday, making oil and other commodities less attractive to investors seeking a hedge against inflation and dollar weakness.

Natural gas futures finished unchanged at $8.726 per 1,000 cubic feet, after swinging into positive and negative territory during trading. On Monday, natural gas plunged 66.3 cents, or 7 percent, to $8.726 per 1,000 cubic feet, its lowest level in nearly six months. Prices have closed lower in eight of the last 11 sessions and dropped 36 percent from the contract's all-time trading high of $13.752, reached July 2.

The pullback is double the size of crude's recent slide. That has fed speculation on Wall Street that a large hedge fund or something like it may be near collapse and has dumped a vast amount of natural gas contracts to free up cash. Last month, SemGroup LP, based in Tulsa, Oklahoma, folded after losing $2.4 billion in bad bets on oil futures. SemGroup's collapse came amid a massive sell off in the oil market.

"Anytime you get that kind of violent price action in a short amount of time, it reeks of someone big being in trouble," Schork said.

Investors on Tuesday ignored continued tension over Iran's nuclear program. Representatives of the five permanent members of the U.N. Security Council and Germany agreed Monday to seek new sanctions against Iran after the country failed to meet a weekend deadline to respond to an offer intended to defuse the dispute, State Department spokesman Gonzalo Gallegos said.

In other Nymex trading, heating oil futures fell 6.81 cents to settle at $3.2820 a gallon, while gasoline prices dropped 4.38 cents to settle at $2.9564 a gallon.