Light, sweet crude for October delivery fell $1.46 to settle at $107.89 a barrel on the New York Mercantile Exchange. It was the lowest settlement price for a front-month contract since April 4.
Crude prices have fallen for five straight sessions, extending an almost two-month slide as traders shift their attention away from supply-threatening storms and back toward a stronger dollar and evidence of falling demand.
On Wednesday, oil prices settled 36 cents lower at $109.35 a barrel, a day after a dramatic, nearly $6 plunge in response to less damage from Hurricane Gustav than the oil industry feared. That brought crude prices in sight of $100 a barrel, a level not seen since April 1.
A smaller-than-expected drawdown of U.S. gasoline stocks was the primary driver of Thursday's declines.
In its weekly inventory report, the Energy Department's EIA said U.S. gasoline stocks fell by 1 million barrels to 194.4 million barrels for the week ending Aug. 29, less than the 1.8 million-barrel drop analysts surveyed by energy research firm had Platts expected.
Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill., said the inventory numbers may have been skewed by market irregularities caused by Gustav, but he said the market appeared to be taking the figures as more evidence of falling demand.
"It's safe to say gasoline demand is still very weak. So far we haven't seen enough of a drop in pump prices to really alter that trend," Ritterbusch said.
At the pump, a gallon of regular slid less than a penny overnight to a new national average of $3.678, according to auto club AAA, the Oil Price Information Service and Wright Express. Prices remain well above the year-ago average of about $2.792 a gallon but have fallen more than 10 percent from the July 17 record average of $4.114 a gallon.
A stronger dollar also weighed on oil prices Thursday. A rising greenback spurs investors to shift funds out of commodities like oil and precious metals, which are traditionally bought as hedges against inflation.
Meanwhile, energy output in the Gulf of Mexico began to slowly come back online after the passage of Gustav. Some oil companies in the western Gulf whose equipment wasn't in the path of the storm began ramping up operations Wednesday and Thursday.
However, 95.2 percent of oil production in the Gulf and about 87.5 percent of natural gas output remained shut down as of Thursday. The Gulf area is home to a quarter of U.S. oil production and 40 percent of refining capacity.
Crude has dropped about $38, or 26 percent, since surging to a record $147.27 a barrel on July 11, as a U.S. economic slowdown spreads overseas and curbs demand for petroleum products.
"Consuming countries like the U.S. and Japan are facing economic problems," said Tetsu Emori, commodity markets fund manager at ASTMAZ Futures Co. in Tokyo. "I think we're heading toward $100 a barrel and if we break that, to between $88 and $95."
Still, analysts caution prices could spike again on an unforeseen geopolitical event or if OPEC countries scale back output. The Organization of the Petroleum Exporting Countries is scheduled to meet next Tuesday in Vienna and has indicated it may take action to defend the $100 a barrel level.
The EIA also said U.S. crude stocks tumbled unexpectedly last week. Crude supplies dropped by 1.9 million barrels to 303.9 million barrels; analysts had expected supplies to increase by 500,000 barrels.
Meanwhile, inventories of distillate fuel, which include diesel and heating oil, fell by 400,000 barrels to 131.7 million barrels. Analysts expected stocks to rise by 1.1 million barrels.
In other Nymex trading, heating oil futures fell 5.51 cents to settle at $3.0237 a gallon, while gasoline futures fell 2.64 cents to settle at $2.7404 a gallon. Natural gas futures rose 5.8 cents to settle at $7.322 per 1,000 cubic feet.
In London, October Brent crude fell $1.76 to settle at $106.30 a barrel on the ICE Futures exchange.
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