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Oil Prices Drop Below $120

Light, sweet crude for September delivery fell more than $5 at one point to $119.50 a barrel on the New York Mercantile Exchange, its lowest level since May 6.

NEW YORK (AP) -- Oil prices plunged in a massive selloff Monday, falling below $120 a barrel for the first time since early May after Tropical Storm Edouard appeared unlikely to threaten oil and natural gas facilities in the Gulf of Mexico.

Also weighing on prices was a report by the Commerce Department that consumer spending fell in June as shoppers dealt with higher prices for gasoline, food and other items. That fed investors' beliefs that a U.S. economic slowdown is forcing Americans to cut back on energy use.

Light, sweet crude for September delivery fell more than $5 at one point to $119.50 a barrel on the New York Mercantile Exchange, its lowest level since May 6. The contract later recovered slightly, trading $4.09 lower at $121.01 a barrel. Crude has now fallen in six of the last nine sessions and has shaved 18 percent off its trading record of $147.27 reached July 11.

Natural gas futures also fell sharply, dropping 62.4 cents, or 6.65 percent, to $8.765 per 1,000 cubic feet. And gasoline futures fell 8.47 cents to $2.996 a gallon.

The dramatic dive in oil came shortly after traders learned that Edouard, aiming for the coasts of Texas and Louisiana, likely would not damage offshore oil and natural gas drilling platforms that sit in the storm's path.

"That has taken a lot of pressure off the market. It looks like the thinking is that we dodged another bullet," said Phil Flynn, analyst at Alaron Trading Corp. in Chicago.

Meanwhile, retail gas prices kept falling, reflecting the continuing price-driven drop in U.S. fuel demand. A gallon of regular gas fell on average about half a penny overnight to $3.881.

Gas has fallen 5.6 percent since hitting an-all time high above $4 a gallon on July 17, but so far hasn't kept up with oil's steep descent, suggesting struggling filling stations are still saddled with gas bought when crude prices were higher.

"They still have expensive gas to feed into the system, so they're reluctant to drop prices," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. "Prices never come down as fast as they go up."

Oil prices began the day trading mostly lower after the Commerce Department said consumer spending fell by 0.2 percent in June, the worst showing since February. Rising costs for gasoline helped push an inflation measurement linked to consumer spending up by 0.8 percent in June, the biggest leap in almost three decades.

"The oil market's main focus right now is on any weakness that signals a slowdown in the economy, and this personal spending report is further evidence of that," Ritterbusch said.

Edouard was threatening to pick up strength from warm Gulf waters and gain near-hurricane speeds over the next 24 hours. forecasters said.

Shell Oil Co. said Monday it had begun evacuating about 40 workers from some of its operations in the western Gulf, but Edouard is not likely to disrupt production, according to one financial firm that specializes in the energy industry.

"He'll just be (a) little tropical storm tike compared to big mamma's that rip things up and spike gas prices," the Houston-based securities firm Tudor Pickering Holt & Co. said in a note to investors Monday.

Crude's sharp drop came as traders ignored escalating tensions between the West and Iran. The Bush administration said Monday the five permanent members of the U.N. Security Council and Germany have agreed to seek more sanctions against Iran over its nuclear program after it failed to meet a weekend deadline to respond to an incentives package aimed at diffusing the standoff.

The statement came two days after Iranian President Mahmoud Ahmadinejad said his oil-producing country would not give up its "nuclear rights," signaling that it would refuse demands to stop enriching uranium or at least not to expand its enrichment work.

"There's concern about a potential confrontation down the line," said Victor Shum, an energy analyst with Purvin & Gertz consultancy in Singapore.

In other Nymex trading, heating oil futures fell 8.4 cents to $3.3528 a gallon. In London, Brent crude for September delivery rose 23 cents to $124.45 a barrel.

Associated Press writers Pablo Gorondi in Budapest, Hungary, Alex Kennedy in Singapore, and Mathew Lee and Martin Crutsinger in Washington contributed to this report.

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