WASHINGTON – The price of oil sank by more than $2 a barrel Thursday, settling at its lowest level in a year as traders focused on the bearish aspects of conflicting market trends. OPEC is cutting output, but the U.S. economy is slowing; winter is near, but the country has an abundance of home heating fuels.
These mixed signals help explain why crude futures have settled in a range roughly between $57 and $61 since the beginning of October.
Even as oil prices fell through the low end of that range Thursday, many analysts remain bullish in their outlooks, citing concerns about instability in Nigeria and Iraq, a recent drop in U.S. refinery output and trading patterns that suggest the market is preparing for a late-year upswing.
"Prices should be rallying," said Peter Beutel of New Canaan, Conn.-based energy consultancy Cameron Hanover.
But Michael Guido, Societe Generale's director of commodity strategy, said traders are no longer responding to the kind of geopolitical news that once reliably sparked buying, including frequent kidnappings of oil workers in Nigeria and threats by Iran to pursue its nuclear program over the objections of Western power.
"Too much money has been lost on what-if scenarios," Guido said, and that has pushed many institutional investors, including hedge funds and pension funds, to the sidelines of the energy market.
Light sweet crude for December delivery fell $2.50 to settle at $56.26 a barrel on the New York Mercantile Exchange — the lowest settlement since Nov. 18, 2005.
Another factor influencing Thursday's selloff: the December contract expires on Friday.
"This is the new pattern for oil trading, it gets weak into expiration," or as the delivery date nears for crude purchased under a futures contract, said Phil Flynn of Alaron Trading Corp. in Chicago. "If you're a buyer, it pays to wait until the last minute."
Nymex crude futures for January delivery also fell sharply, settling at $58.57, down $2.15. And in London, January Brent crude futures declined by $2.07 to settle at $58.54 on the ICE Futures exchange.
In its latest weekly report, the Energy Department said Thursday that the nation's inventory of natural gas grew last week by 5 billion cubic feet to 3.45 trillion cubic feet, or 7.4 percent above the five-year average for this time of year.
Natural gas futures fell after the data were released, dragged down in part by what has so far been a mild autumn in the Northeast and Midwest, the major consuming regions for home heating fuels.
Nymex natural gas for December delivery slid by 36.5 cents to settle at $7.755 per 1,000 cubic feet.
The Organization of Petroleum Exporting Countries last month announced its intention to cut production by 1.2 million barrels a day — 4 percent of its output — to shore up oil prices, which have tumbled by more than $20 since a mid-July peak above $78 a barrel. The cartel has said it will cut output further at its December meeting if prices continue to fall.
Still, some market skepticism persists about how serious OPEC members are about actually reducing their oil sales at a time of historically high prices. To make matters more complicated, traders must sift through often conflicting reports from consulting firms that attempt to track shipments of OPEC crude.
At the same OPEC is trying to tighten up the market, economic growth is slowing in the United States, the world's largest energy consumer. The International Monetary Fund forecasts gross domestic product for the U.S. to grow by 2.9 percent in 2007, a decline from an estimated increase of 3.4 percent in 2006.
In its monthly oil market report, released Wednesday, OPEC signaled particular concern about weakness in the U.S. housing market and its potential to spillover into other areas of the economy.
In other Nymex trading, gasoline futures declined by 5.25 cents to settle at $1.5296 a gallon, while heating oil futures fell by 3.19 cents to settle at $1.6605 a gallon.
On Wednesday, the U.S. Energy Information Administration said in its weekly report that inventories of distillate, which include heating oil and diesel fuel, fell by 3.6 million barrels last week to 135 million barrels. That is 6 percent above year ago levels.
The EIA reported that demand for distillates over the last four weeks has been the highest four-week average ever for any period that doesn't include January or February, when cold weather usually causes heating oil demand to peak. The EIA noted, though, that the high demand numbers could be caused by retailers and consumers buying fuel to pad their own inventories ahead of winter.
"This week's petroleum data can be interpreted by different analysts to reach totally different conclusions," the EIA said.