Oil Falls on Economic Worries

Oil prices fell below $86 a barrel Thursday as investors focused on global economic issues, including the so-called "fiscal cliff" in the U.S.

In afternoon trading benchmark crude dropped 88 cents at $85.44 in New York.

Expiring tax cuts and broad spending cuts will take effect in January unless the White House and Congress make a deal. Economists worry that that would have a serious impact on the economy. Slower economic growth means less demand for fuels such as gasoline, heating oil, and natural gas.

On Thursday the U.S. Energy Information Administration said crude oil supplies grew by 1.1 million barrels last week to 375.9 million barrels. That's 11.6 percent above year-ago levels, but it's also less than the 1.5 million barrels expected by analysts surveyed by Platts, the energy information arm of McGraw-Hill (NYSE: MHFI  ) . Meanwhile, gasoline supplies shrank. Analysts had expected gasoline supplies to be unchanged from the previous week.

AAA said average gasoline prices at the pump fell a half-penny to $3.438 per gallon from Wednesday.

Oil prices had risen earlier in the day following Israel's attack on Islamic militants in Gaza. However, analysts downplayed the risk that the fighting poses to energy supplies.

In other energy futures trading on the New York Mercantile Exchange:

  • Heating oil fell 2 cents to $2.97 per gallon.
  • Wholesale gasoline was unchanged at $2.67 per gallon.
  • Natural gas rose 1 cent to $3.86 per 1,000 cubic feet. The EIA said gas supplies fell last week more than analysts expected, in the first weekly decline this year. Inventory levels are still 1.8 percent above where they were a year ago.

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