OIL prices ended a choppy session slightly lower yesterday, falling below US$106 a barrel as weak US fuel demand and a stronger dollar outweighed concerns over a reduction in global crude output.

Light, sweet crude for November delivery fell 88 cents to settle at US$105.73 a barrel on the New York Mercantile Exchange after rising as high as US$109.50. On Tuesday, the contract fell US$2.76 to settle at US$106.61. In London, November Brent crude fell 63 cents to settle at US$102.45 a barrel on the ICE Futures exchange.

Crude prices have risen about US$15 in the past week as investors funnel money back into commodities on worries that a proposed US$700 billion bailout of financial firms will undercut the dollar and boost inflation.

But analysts said signs of weak US demand for fuel have taken some of the momentum out of the rally. The economic slowdown has forced American consumers and businesses to cut back on energy use, sending oil prices falling from a record US$147.27 a barrel reached July 11.

Demand for gasoline over the four weeks ended Sept. 19 was 3.5 percent lower than a year earlier, averaging 9 million barrels a day, the US Energy Department's Energy Information Administration said in its weekly inventory report.

'Demand continues to be sluggish at best,' said Andrew Lebow, senior vice president and broker at MF Global in New York. 'Some people want to own real assets as an inflation hedge but others see crude as a consumable good, and any economic weakness is going to be bearish factor even if this bailout gets approved.'

Still, some analysts say crude could be heading higher amid falling global supplies. About 66 percent of oil production and 61 percent of natural gas output in the Gulf of Mexico remains shut-in after the passage of Hurricanes Gustav and Ike, according to the US Minerals Management Service. The Gulf area is home to a quarter of US oil production and 40 percent of refining capacity.



OPEC's decision earlier this month to cut production by 520,000 barrels a day and militant threats to Nigerian oil supplies have added to the supply shortage.

'The market is starting to come to grips with how bad the supply situation is going to be,' said Phil Flynn, analyst at Alaron Trading Corp. in Chicago. 'We really can't afford to lose any more barrels.'

Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson were on Capitol Hill yesterday for a second day of testimony about the bailout plan. On Tuesday, Paulson and Bernanke told legislators that without the move, neither businesses nor consumers would be able to borrow money, and the world's largest economy would grind to a virtual halt.

Congressional leaders predicted the emergency rescue would pass, but with significant changes. Democrats and Republicans alike demanded that the bailout limit pay packages for executives of companies helped by the rescue.

Oil investors have also been weighing what impact the bailout plan will have on the value of the dollar, which gained slightly against the euro. Investors often buy crude futures as a hedge against a weakening dollar and inflation, and sell them when the greenback recovers. The 15-nation euro bought US$1.4652 late yesterday, down from US$1.4721 in New York late Tuesday.

'There's been a close correlation between oil and the dollar in the last week or so. Oil is tracking that pretty closely,' said Mark Pervan, senior commodity strategist with ANZ Bank in Melbourne. 'And there's a real question mark over the direction of the dollar.'

In its weekly inventory report, the EIA said US crude stocks fell unexpectedly last week. US crude inventories fell by 1.5 million barrels, 0.5 percent, to 290.2 million barrels for the week ending September 19, according to the EIA. Analysts surveyed by energy information provider Platts had expected oil stocks to rise by 1.6 million barrels.



Meanwhile, gasoline inventories dropped by 5.9 million barrels, or 3.2 percent, to 178.7 million barrels. Analysts expected stockpiles of the motor fuel to fall by 5.1 million barrels.

Inventories of distillate fuel, which include diesel and heating oil, slid by 4.2 million barrels to 125.4 million barrels for the week ended September 19. Analysts expected distillate stocks to decrease by 1.8 million barrels.

In other Nymex trading, heating oil futures rose 1.38 cents to settle at US$3.027 a gallon, while gasoline prices fell less than half a penny to settle at US$2.5947 a gallon. Natural gas for October delivery fell 23.6 cents to settle at US$7.908 per 1,000 cubic feet.