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Oil falls after government says gas demand is down

NEW YORK - Oil prices extended their drop from record highs Wednesday, falling to the $122 level after the Energy Department said gasoline demand fell sharply last week.

Retail gas prices, meanwhile, rose to a new record above $3.98 a gallon and are likely to hit $4 in coming days, although oil prices have retreated nearly $13 from last month's record levels.

In its weekly inventory report, the department's Energy Information Administration said demand for gasoline fell by 1.4 percent over the last four weeks. Meanwhile, gasoline inventories rose by 2.9 million barrels last week, more than three times the increase analysts polled by energy research firm Platts had expected.

Concerns about demand have helped pull oil down from its May 22 high of $135.09. Those concerns were exacerbated Wednesday by the EIA report and by moves by India and Malaysia to cut fuel subsidies, effectively raising prices. Many investors believe subsidy cuts will choke off demand for fuel in the developing world.

'There's definitively smaller demand, (and) you have subsidies that are going to fall in energy consuming nations,' said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com. 'The psychology is just changing.'

Light, sweet crude for July delivery fell $2.01 to settle at $122.30 barrel on the New York Mercantile Exchange after earlier falling as low as $121.84. It was oil's lowest settlement since May 6. July gasoline futures plummeted 15.74 cents to settle at $3.1951 a gallon.

At the pump, meanwhile, the national average price of a gallon of regular gas rose half a cent overnight to $3.983, according to a survey of stations by AAA and the Oil Price Information Service. Prices are likely to reach $4 for the first time regardless of what happens with oil prices, said Fred Rozell, retail pricing director at the OPIS, which is based in Wall, N.J.