Oil gains ground but natural gas continues slide

Light, sweet crude for September delivery rose $1.05 to settle at $125.49 a barrel on the New York Mercantile Exchange--gaining back only about a quarter of Wednesday's decline. August natural gas tumbled 46.5 cents to settle at $9.283 per 1,000 cubic feet, its lowest point since March.

At the gas pump, prices continued their retreat. The national average for a gallon of regular dropped more than a penny and a half to $4.026 a gallon, according to auto club AAA, the Oil Price Information Service and Wright Express. Retail diesel is down nearly half a cent to $4.788.

Falling prices at the filling station reflect the concern of many energy traders that the weakening U.S. economy is hurting demand. Analysts say that is helping keep oil prices from racing back higher.

The day's gains followed a sharp drop on Wednesday, when oil tumbled $3.98 to settle at $124.44 a barrel, its lowest finish since June 4. Crude has fallen in six of the past eight sessions, and now sits nearly 15 percent below its peak above $147 a barrel earlier this month.

In overnight trading, oil rose as high as $126.01 as some investors tried to see if the market had reached a bottom and could rebound. But the gains couldn't hold amid a growing belief that falling demand does not justify the recent high price.

Americans used 2.4 percent less fuel over the past four weeks than they did last year, the latest figures by the Energy Department's Energy Information Administration show. While that may not sound like much, industry experts say it represents a significant shift by the world's largest energy consumer. A bigger-than-expected increase in gasoline supplies only added to concerns that drivers are cutting back.

"We've grounded airplanes. People are driving less, they're trading in their SUVs," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com. "For the foreseeable future--at least for the next 6 to 12 months--we have demand destruction."

Cordier predicted prices could yet drop further, with oil possibly falling as low as $110 a barrel by September.

"People have changed their driving habits, and they're not going to change back anytime soon," he said.