Oil Prices Slip Below $56 on Inventory Data, Weather

Oil prices shed more than $2 Thursday to settle at their lowest level since June 2005, after the U.S. government reported higher-than-expected inventories of gasoline, heating oil and diesel fuel amid warm winter temperatures.

An unseasonably mild winter in the Northeast and Midwest has led to a buildup in inventories and, as a result, weaker prices.

"There is no winter at all, thus we have a lot of supplies with no home and prices have nothing to do but fall," said James Cordier, president of Liberty Trading Group in Tampa, Florida.

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Light, sweet crude for February dropped $2.73, or 4.7 percent, to settle at $55.59 a barrel on the New York Mercantile Exchange. The settlement follows a 4.5 percent decline on Wednesday and represents the lowest settlement price since June 15, 2005.

U.S. crude inventories declined last week by 1.3 million barrels to 319.7 million barrels compared with the previous week, the Energy Information Administration reported Thursday. Analysts on average had expected crude stocks to rise by 930,000 barrels, according to a survey by Dow Jones Newswires.

However, distillate inventories, which include diesel fuel and heating oil, increased by 2 million barrels to 135.6 million barrels as warm winter weather hurt demand. Distillate stocks were expected to increase by an average of 1.15 million barrels.

Weather has become an increasingly important factor in the price of oil in recent years. A warm winter and a mild hurricane season last year have combined with a forecast for warmer-than-normal temperatures this winter to pressure oil prices.

Demand for heating oil has been running 20 percent to 30 percent below normal for most of the past five weeks, said Man Financial commodities analyst Edward Meir, in a note to clients.

Meanwhile, gasoline inventories in the U.S. swelled by 5.6 million barrels last week to 209.5 million barrels, the EIA said, compared to analysts' estimate for an average increase of 1 million barrels.

Gasoline prices fell 6.19 cents to settle at $1.4870 a gallon on Nymex. Heating oil futures fell 4.5 cents to end at $1.5431 a gallon, while natural gas prices fell a fraction of a penny to settle at $6.162 per 1,000 cubic feet.

If energy prices keep falling, OPEC may be moved to reduce oil production again. After oil prices began deflating last fall, the Organization of Petroleum Exporting Countries agreed to a 1.2 million barrel-a-day cut in crude output beginning in November and another 500,000 barrel-a-day cut set to begin Feb. 1.

Western states have recently seen snow and freezing temperatures, and two major snow storms hit Colorado last week. But Fadel Gheit, senior energy analyst with Oppenheimer & Co., notes that about 80 percent of heating fuel demand comes from the densely populated Northeast and Midwest, where temperatures have been balmy.

Gheit said last week's snow storms — which forced hundreds of canceled flights and road closures — may have contributed to the decline in demand for gasoline and jet fuel.

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