NEW YORK - Oil prices pulled back Thursday, retreating from the previous day's big rally, as disappointing data on the U.S. economy signaled further cutbacks in energy demand for the world's thirstiest oil consumer.
Light, sweet crude for September delivery fell $2.81 to $123.96 a barrel in late morning trading on the New York Mercantile Exchange, after posting gains earlier in the day.
Prices surged $4.58 on Wednesday to settle at $126.77 after the government reported a surprise drop in U.S. gasoline supplies. The rally halted a dramatic two-week slide in which crude shaved 17 percent off its all-time high above $147, reached July 11.
The Commerce Department said U.S. gross domestic product rose 1.9 percent in the second quarter despite government tax rebates aimed at jolting the economy. Economists had expected growth of 2.4 percent.
Earlier data also was revised downward. The weak 1 percent GDP figure of the first three months of 2008 was modified lower to 0.9 percent, while an earlier estimate of annual growth of 0.6 percent in the last quarter of 2007 now showed a negative number, with the economy contracting by 0.2 percent on annual basis in that period.
The tepid results rekindled fears of a recession, prompting energy traders to sell oil contracts on fears that more belt-tightening lay ahead for cash-strapped Americans who are already driving less to cope with almost $4-a-gallon gasoline.
"If the economy weakens, the demand for oil products in the U.S. is going to continue to slide," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. "People looked at yesterday's frenzied rally and realized the fundamentals weren't there to support it."
Prices were also pressured as traders cashed in profits from Wednesday's rally. Some analysts attributed the spike to low trading volume in oil markets, which can increase volatility.
Speculative traders, particular large investment funds, have been liquidating oil positions in recent months and are now shorting crude contracts, or betting that prices will fall, for the first time in 17 months.
"We're seeing a lower volume trade because this bull market seems to be over at least for the time being," Ritterbusch said.
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.
Analysts indicated that despite the reduction, gasoline stocks were still relatively ample.
"It should be pointed out that gasoline stocks are healthy and remain 3 percent above the 5-year average," said a report by JBC Energy in Vienna, Austria.
Also, the EIA figures showed while gasoline demand reached a yearly high of 9.47 million barrels a day, that still was 2 percent lower than a year ago, JBC said.
In other Nymex trading, heating oil futures fell 7.92 cents to $3.4411 a gallon while gasoline prices lost 8.26 cents to $3.0525 a gallon.
Also Thursday, the Energy Department's Energy Information Administration said in its weekly report that natural gas in storage in the U.S. rose last week but is 0.5 percent below the five-year average for this time of year.
Natural gas futures shed 6 cents to $9.188 per 1,000 cubic feet.
In London, September Brent crude fell $3.10 to $124 a barrel on the ICE Futures exchange.
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Associated Press writers Pablo Gorondi in Budapest, Hungary, Alex Kennedy in Singapore and Tim Paradis in New York contributed to this report.
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