Updated from 2:27 p.m. EDT

Oil and gasoline prices tripped lower Thursday after an opening rally failed and bulls again faced the possibility of improving supply fundamentals.

The May futures contract closed down $1.74 at $54.11 on Nymex. Since closing at $57.27 Friday, crude has fallen every day this week and is off more than $3, or 5%. Unleaded gasoline fell about 9 cents to $1.567.

The decline in gasoline prices came despite an Energy Department report that said U.S. gasoline demand will probably rise 1.8% this summer from a year ago.

"Just like there was no real reason for the rise in oil prices over the last few months, there is no substantial reasoning behind today's sell-off, either," said futures analyst Jeff Mokychic at Bridgeton Global Investor Services. "There is some data that traders are looking at, which is a slight rise in refinery production and capacity."

According to the Energy Department, U.S. refining rose by 424,000 barrels a day in the week ended April 1 to 8.6 million barrels, while production capacity rose to 93.7% from 91.1%.

The gain eases some concerns analysts had about refining capacity, and could reinforce notions that more refineries are likely to come on line ahead of the driving season.

Elsewhere, Saudi Arabia Thursday once again pledged to produce as much oil as possible to alleviate the recent price shock, which has oil up about 50% from this time last year. OPEC's biggest contributor and the world's largest exporter is capable of pumping more than 11 million barrels a day, although it is unclear how long it could sustain that output.

Saudi efforts to talk down the market over the last year have had a limited effect. The latest Saudi pledge comes as OPEC considers another output increase. The cartel agreed to add 500,000 barrels a day to its official production ceiling at its regular meeting three weeks ago, but has since vacillated on additional measures.

Many analysts say OPEC is already producing more than it formally says it is, to take advantage of the high price. That suspicion makes it hard to know whether another pledge from OPEC about additional production would actually affect oil supply and prices.

Prices closed slightly lower in a volatile session Wednesday, following Energy Department inventory data that largely met expectations.

"It's a surprise that prices have stayed so high, and even more surprising that there hasn't been much reaction to it from the demand side," said Chip Hodge, who manages a $4.5 billion gas and oil fixed-income portfolio at John Hancock Financial Services. At some point though, he says, high prices will start to matter and slow the raging demand, "there must be a breaking point," Hodge said.

But opportunities in the oil and gas industry have been rare for fixed-income investors, simply because companies are doing so well and not issuing any debt, Hodge says. That, however, doesn't mean there is no interest in investing.

Hodge says he is eyeing refiners, especially those that have the capacity to process heavier, high sulfur-containing oil, such as

Valero Energy

(VLO) - Get Report

, and

Premcor

(PCO)

, which is working on upgrading its refineries to process cheaper crude, Hodge said.

One upcoming deal that is highly anticipated by fixed-income investors is a private placement by

Cheniere Energy

(LNG) - Get Report

, which develops receiving terminals for liquefied natural gas. Hodge estimated the company will raise approximately $750 million to $1 billion to finance a new terminal in Texas that will receive, process and transport about 1.5 billion cubic feet of liquefied natural gas a day.

Earlier this week,

Fed

Chairman Alan Greenspan predicted prices would fall, if only because consumption would weaken amid record high prices.

Shares of major oil producers were mixed in late day trading.

ExxonMobil

(XOM) - Get Report

dropped 29 cents, or 0.39%, to $60.66;

ChevronTexaco

(CVX) - Get Report

gained 59 cents, or 1.01%, to $57.81;

Royal Dutch/Shell

(RD)

gained 63 cents, or 1.04%, to $61.37;

BP

(BP) - Get Report

rose 36 cents, or 0.57% to $63.62; and

ConocoPhillips

(COP) - Get Report

lost 63 cents, or 0.57%, to $110.24.