Oil prices fell below $78 a barrel Thursday, extending losses amid a stronger U.S. dollar and signs the global economy will grow at a slower rate in the second half of the year than previously expected.
By early afternoon in Europe, benchmark crude for September delivery was down 75 cents at $77.31 a barrel in electronic trading on the New York Mercantile Exchange. The contract fell $2.23 to settle at $78.02 on Wednesday.
Oil traders look to equities as a gauge of overall investor sentiment, and most Asian stock markets fell while European stocks were mixed on Thursday.
The Dow Jones industrial average plunged 2.5 percent Wednesday after the Federal Reserve warned the recovery is weak and the trade deficit widened in June to its highest level in 20 months as exports dipped. This could signal a slowdown in manufacturing and a slumping economy.
"The economy is still very fragile and wishy-washy, every couple weeks the mood of the market changes," Sander Capital said in a report. "The economy has a fear of devaluing assets and if this occurs then consumers will not consume."
Despite data showing a draw in U.S. crude oil stocks last week, analysts said the figures could not be taken at face value.
"This week's (Department of Energy) report did nothing to change the perception that oil is a commodity in abundant supply that has only rallied recently on the back of gains in the euro, the stock market or both," said a release from U.S energy consultancy Cameron Hanover.
"Crude oil stocks fell, but they have been at their highest levels for the end of July in years. Distillate stocks were higher, yet again, and gasoline stocks grew for the seventh straight week, which is not what they should be doing during the heart of 'driving season.'"
A stronger dollar continued to hurt oil prices, making crude less attractive to investors holding other currencies. The euro was down to $1.2833 on Thursday from $1.2882 late Wednesday in New York.
On the bullish side, severe storms in the Gulf of Mexico over the coming weeks have the potential to disrupt oil production in the area.
"We do not expect oil prices to dip below the $70 mark, especially now that the hurricane season starts to get into high gear next month," said a report from MF Global in New York.
In other Nymex trading in September contracts, heating oil fell 2.40 cents to $2.0512 a gallon, gasoline dropped 0.72 cents to $1.9904 a gallon and natural gas slid 0.3 cent to $4.323 per 1,000 cubic feet.
In London, Brent crude was down 83 cents at $76.81 a barrel on the ICE Futures exchange.
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Associated Press writer Alex Kennedy in Singapore contributed to this report.
