Crude oil prices opened the new year 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. It was the biggest one-day drop since Aug. 17, 2005, when crude fell $2.83 to settle at $63.25 a barrel.
The Nymex trading floor had been closed Monday for New Year's Day and again on Tuesday for memorial services 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.
With the new drop, prices are starting to near the levels 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 an increasingly weather-driven market: Oil surged to $70 a barrel for the first time in 2005 as Hurricane Katrina ravaged the Gulf Coast, broke above $78 a barrel in July 2006 on fears of another bad storm season, and then sank 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 2005.
Last week, the U.S. government reported that total crude-based products supplied over the previous four weeks, which include gasoline, jet fuel, distillates, propane and other fuels, were slightly below where they were a year ago, indicating lower demand.
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 being driven by 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 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 the Organization of Petroleum Exporting Countries; and ongoing political turmoil in oil-producing regions, such as Nigeria and the Middle East.
It was unclear if Wednesday's sharp decline will mark the beginning of a long-term downtrend, or merely short-term weakness. Evans said prices have the potential to rebound, given that at this time last year oil surged amid 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.
OPEC's concerns that high global stockpiles and sluggish demand would cause prices to drop led the group to agree on a 1.2 million barrel-a-day cut in crude output starting 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 further downtrend in OPEC oil," Evans said.
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