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Updated from 1:55 p.m. EDT

Oil prices fell to an 11-week low Wednesday, as new data revealed a significant increase in U.S. fuel stockpiles and a drop in consumer demand.


American Petroleum Institute

, or API, reported late Tuesday that U.S. stocks of crude oil, gasoline and distillates like heating oil increased substantially over the past week. According to the industry group's report, crude oil inventories rose by 1.883 million barrels in the week ending July 21. Gasoline stocks were up by 1.713 million barrels while distillates increased by 1.732 million barrels.

In addition, the API reported that crude oil imports to the U.S. reached a near-record 10 million barrels a day over the past week, with capacity utilization growing about 1% to 96.6%.

Meanwhile, skyrocketing gas prices -- as high as $2 a gallon in some Midwestern states -- finally appear to be affecting consumer demand. While petroleum demand in North America was unchanged for the first half of the year, compared with the first six months of 1999, new statistics show it has started to slip.

The four-week average demand for gasoline is now about 8.6 million barrels a day, down sharply from 8.97 million barrels a year ago, according to the

GNI Ltd.

research group. In the past week alone, demand dropped to 8.12 million barrels a day -- down almost a million barrels a day from the week before.

The combination of increased inventories and decreased demand weighed heavily on crude oil, as well as heating oil and unleaded gas prices, for a good portion of the trading day. Brent crude closed at $26.94 in London Wednesday, barely above its intrasession low of $26.81.

On the

New York Mercantile Exchange

, crude oil for September delivery lost 14 cents to close at $27.81, the lowest level since mid-May.

Futures contracts on unleaded gas closed up just .007 cents at 82.7 cents a gallon, after falling to a session low of 81.8 cents earlier in the day. Heating oil prices were nearly unchanged at 76.2 cents from the opening price (and session low) of 76.1 cents a gallon.

"If the market can't generate more of a bounce even in the next few days, that's going to be the signal that the bull market is really dead," said Tim Evans,

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senior energy analyst. "It's potentially panic time."

Oil prices have dropped nearly $3 a barrel since last week on mounting evidence that Saudi Arabia, the world's largest oil producer, has gone ahead with a proposed production increase, despite the reluctance of other members of the

Organization of Petroleum Exporting Countries

, or OPEC.

"The risk here is if we make a fresh break to the downside, then the market really looks terrible," Evans said. "That's a very real possibility."

OPEC already lifted output twice this year by more than 2.4 million barrels per day -- most recently on July 1, when the group increased its official daily production quota to 25.4 million barrels a day.

While OPEC's recent

agreement raised the daily output ceiling by 708,000 barrels, the actual increase in production is expected to be much lower. By some estimates, the increase is less than 300,000 extra barrels a day. Many OPEC members were already exceeding their production quotas, producing at or near capacity before the new agreement went into effect. In fact, the

Oil and Gas Journal

reports that OPEC crude oil production already averaged 27.2 million barrels a day -- nearly 2 million barrels more than the current quota.

OPEC's president, the Venezuelan oil minister Ali Rodriguez, has said he received assurances from Saudi Arabia that OPEC's largest member would not initiate a unilateral production increase. But analysts say the recent drop in crude oil prices was likely prompted by indications Saudi Arabia may have covertly increased production by 250,000 barrels a day already and rumors that it intends to double that figure in August.

Earlier this week, Rodriguez said OPEC would increase oil output in September if demand remains high enough to absorb the extra barrels. But the likelihood of an official output increase is diminishing as evidence mounts that prices and demand are easing.

Under an informal agreement reached in June, OPEC oil ministers agreed to consider increasing production by a half-million barrels a day if the price of the cartel's basket stayed above $28 a barrel for 20 consecutive days. But the organization's basket of seven types of crude oil fell to $25.40 a barrel on Tuesday from $25.70 on Monday, according to


reports, well below the $28 threshold that would trigger extra supply from OPEC.