Oil prices fall below $59 a barrel as U.S. winter remains mild

Wednesday, January 3rd 2007, 3:42 pm

By: News On 6

NEW YORK (AP) _ Crude oil prices started 2007 by plunging 4.5 percent on Wednesday, as persistent mild weather in the United States led traders to bet on lagging demand for heating fuels.

Light, sweet crude for February delivery on the New York Mercantile Exchange fell $2.73 from Friday's settlement price to a six-week low of $58.32 a barrel.

The Nymex trading floor was closed Monday for New Year's Day and Tuesday for the memorial service for former U.S. President Gerald Ford.

Temperatures in New York City were in the 50s on Wednesday, and are expected to surpass 60 degrees over the weekend. Forecasters are saying the warmer-than-normal temperatures in the Northeast United States _ the biggest heating oil-consuming region _ will continue through January.

``That's going to put heating oil distributors around the country in pretty bad shape,'' said Mike Fitzpatrick, a vice president for energy risk management at Fimat USA.

Traders were pulling down prices near the low levels they reached late in 2006: ``If those are breached, they can fall a long way,'' Fitzpatrick said.

On Nov. 17, the crude contract had closed at $55.81 a barrel, the lowest settlement since June 15, 2005.

Crude hasn't settled above $64 a barrel since September, in what's become a largely weather-driven market in recent years: surging to $70 a barrel for the first time in 2005 as Hurricane Katrina ravaged the Gulf Coast, breaking above $78 a barrel in July 2006 on worries of another bad storm season, and then sinking to $60 a barrel when those expectations weren't met.

The front-month crude contract finished 2006 at $61.05 a barrel _ a penny above where it ended a year earlier.

This year's mild winter has arrived against a backdrop of ample global crude inventories, slowing economic growth in the United States, and a production spurt from non-OPEC countries.

The selling in the energy market is also due to a cooling off in the commodities boom, said Tim Evans, energy analyst at Citigroup Global Markets.

``You do have weather as one element in the story, but it also just looks like there is a broader flow of selling around the commodity world today,'' Evans said, pointing to corresponding drops in metals and grains prices Wednesday. ``It's a pretty consistent picture that investors just don't want to own commodities at the moment.''

Analysts are split on whether crude oil prices will stay below the 2006 average of about $66 a barrel or rise to new heights this year. Arguments for the latter forecast include ballooning energy demand in some parts of the world, including China; threats of production cuts by OPEC; and ongoing political turmoil in oil-producing regions, such as Nigeria and the Middle East.

It was unclear if Wednesday's sharp decline is the beginning of a long-term downtrend, or merely short-term weakness. Evans said prices have to potential to rebound, given that at this time last year prices surged on worries about violence in Nigeria and Iran's nuclear capabilities: ``Both of those situations are somewhat more critical today than they were a year ago,'' Evans said.

The Organization of Petroleum Exporting Countries' concerns that high global stockpiles and sluggish demand would cause prices to drop led it to agree on a 1.2 million barrel-a-day crude oil output cut in November and a further 500,000 barrel-a-day cut starting Feb. 1.

``While compliance with production cuts has not been stellar, OPEC production has been trending lower month by month since July. With room for better compliance and a further 500,000 barrel per day cut scheduled for Feb. 1, we can expect a futher downtrend in OPEC oil,'' Evans said.

In other Nymex trading Wednesday, heating oil futures fell 6.01 cents to settle at $1.5881 a gallon, while gasoline futures fell 6.71 cents to settle at $1.5489. Natural gas futures dropped 13.6 cents to settle at $6.163 a gallon.

The Brent crude contract for February delivery fell $2.48 to settle at $57.96 a barrel on the ICE Futures exchange, which was open on Tuesday.

Also Wednesday, traders positioned themselves ahead of the U.S. Energy Information Administration's weekly report, which is expected to show that crude oil inventories fell last week for the fifth week in a row, while products rose.

Crude stocks are expected to fall by 1.32 million barrels, on average, according to a Dow Jones Newswires survey of analysts. Distillate stocks, which include heating oil and diesel fuel, are expected to increase by an average of 220,000 barrels, while gasoline inventories were seen rising by an average of 590,000 barrels.