Oil futures reverse three-day rally

The government expects gas prices to peak at $3.40 this spring.

NEW YORK (AP) — Oil futures fell Tuesday, reversing a three-day rally, after the Energy Department cut price and demand forecasts for this year, citing the slowing economy.

In a monthly report, the Energy Department’s Energy Information Administration said demand for oil and petroleum products won’t grow as fast this year as previously expected. That means that prices won’t be quite as high this year as the EIA previously forecast.

For instance, gasoline is now expected to peak at $3.40 a gallon in the spring, a record, but less than the $3.50 spike the EIA predicted in last month’s report. And crude oil, forecast in last month’s report to average $87 a barrel this year, is now expected to average $86.46 a barrel. Prices are expected to fall next year.

“It’s definitive now that we have smaller demand coming up ... and supplies seem ample,” said James Cordier, president of Liberty Trading Group in Tampa, Fla.

Light, sweet crude for March delivery fell 81 cents to settle at $92.78 a barrel on the New York Mercantile Exchange.

After oil rose $6.45 a barrel since last Wednesday, some investors moved to lock in profits in case the Energy Department, in a separate report today, reports a much bigger-than-expected jump in supplies.

In its weekly inventory report, the EIA is expected to report that crude inventories grew 2.5 million barrels last week, according to the average estimate of analysts surveyed by Dow Jones Newswires. Gasoline supplies likely also rose, while supplies of distillates, which include heating oil and diesel fuel, likely fell.

Tuesday’s EIA report drew investors’ attention away from remarks by Venezuelan President Hugo Chavez, who on Sunday threatened to cut oil sales to the U.S.

The move would be in retaliation for action by Exxon Mobil Corp., which last week won court orders freezing as much as $12 billion of the assets of state-owned oil company Petroleos de Venezuela SA. Exxon Mobil is fighting Venezuela’s nationalization of a multibillion dollar oil project.

Also pressuring prices Tuesday was word that a new Saudi oil field might start producing as much as 500,000 barrels of crude a day later this month.

At the pump, meanwhile, gas prices rose 0.8 cent overnight to a national average of $2.961 a gallon. Gas prices, which typically lag the futures market, have mostly fallen in recent weeks as oil retreated from last month’s record above $100 a barrel.