Fears that demand is falling push down oil price to $127

Oil dropped below $127 a barrel today on worries that soaringprices have eaten away at demand and a U.S. probe into futurestrading continued to weigh on the market.

Light, sweet crude for July delivery was down $1.04 to $126.31 abarrel in electronic trading on the New York Mercantile Exchange bymidday in Europe.

On Friday, the contract settled at $127.35 a barrel, up 73 centsafter dipping below $125 and then rebounding.

In London, July Brent crude futures fell $1.03 to $126.75 abarrel on the ICE Futures exchange in London.

Jitters about record high fuel and energy prices - particularlyin the U.S., which has just started its summer driving season - havehelped to pull oil off the $135.09 a barrel trading record hit May22. Data from the U.S. Energy Department and Federal HighwayAdministration and several surveys in recent days suggest Americanconsumers are driving less.

The decision by some countries in Asia, like Indonesia, to lowersubsidies on oil products, also was seen as having a bearish effecton the market.

Additional selling pressure came with last week's announcementfrom the Commodity Futures Trading Commission about an investigationinto possible price manipulation in oil futures markets. Thecommission also announced new rules designed to increasetransparency of U.S. and international energy futures markets.

"There are more concerns on the high pricing we have seen, thatit will have a negative impact on demand, and the fact that the CFTCis expanding its investigation of manipulation in the oil markets,"said Victor Shum, an energy analyst with Purvin & Gertz inSingapore.

"The seesaw we've seen in the last few days is an indication thatthe oil market may have peaked," Shum said.

"Having said that ... the reality is that even though we havecrude off the peak of $135 there are still supply-side issues goingforward," he said. "The hurricane season is certainly one factor tocontend with."

Tropical Storm Arthur formed Saturday afternoon - one day beforethe official start of the 2008 Atlantic Hurricane season - andthough it caused the temporary closure of two of Mexico's oil exportports, it wasn't expected to cause any severe disruptions to oilshipments. On Sunday, the storm weakened to a tropical depression.