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Flight to Safety Sends Oil Prices Down 2.8%

Oil for September delivery lost $2.23, or 2.8%, to settle at $78.02 a barrel.
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) -- Demand for crude oil was stronger than expected last week but an unexpected build in fuel supplies pushed crude prices down 2.8% for Wednesday's session.

A much stronger U.S. dollar also weighed significantly on oil as investors fled riskier assets for safe havens.

Disappointing figures out of China


a widening domestic trade deficit,

and a wavering global demand outlook tarnished the commodity's investment appeal. Although the International Energy Agency said it expects to see growth in 2010 and 2011, it also cautioned about headwinds and demand uncertainty, according to

The Associated Press

. Meanwhile, the dollar index showed that the greenback strengthened 1.7% against a basket of foreign currencies.

For the week ending Aug. 6, oil inventory levels fell by 3 million barrels, the Energy Information Administration said. The decline was more bullish than expected, as a survey of analysts by Platts had projected a loss of 2.4 million barrels. The tally also outdistanced estimates from the industry's own American Petroleum Institute, which reported a 2.19 million barrel drawdown late Tuesday.

But gasoline stocks rose by 400,000 barrels, according to the EIA, despite estimates calling for those supplies to fall by 1.5 million barrels. In addition, distillate inventories climbed by 3.5 million barrels, the EIA said. The Platts survey showed analysts were looking for a less bearish build of 1.1 million barrels.

The September delivery crude contract on the Nymex shed $2.23, or 2.8%, to settle at $78.02 a barrel. The September gasoline contract lost 9 cents, or 4.2%, to settle at $2 a gallon, and September heating oil finished 5 cents lower, or off by 2.4%, at $2.08 a gallon.

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Stocks tanked

on the dismal outlook and closed near session lows with each of the major market averages down by roughly 3%.

Energy stocks failed to soften declines, as the NYSE Arca Oil index and the Philadelphia Oil Service Sector index dropped 3.3% and 3.7%, respectively. Shares of blue-chip components

Exxon Mobil

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(CVX) - Get Chevron Corporation Report

fell 1.7% and 2.4%, respectively.

Analysts are expecting natural gas storage levels to rise by 32 to 36 billion cubic feet when the EIA reports inventory statistics Thursday morning. On Wednesday, the September natural gas contract gained 3 cents, or 0.7%, to settle at $4.33 per million British thermal units.

--Written by Sung Moss and Melinda Peer in New York


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