Energy Prices End Higher

Updated from 11:10 a.m. EST

Energy prices finished the year on a high note despite thin volume and warm weather ahead of New Year's.

February crude hit another two-week high Friday, finishing an abbreviated session up 58 cents at $60.90 a barrel. Natural gas, which often moves in the same direction as crude because many domestic power plants and factories use both oil and gas, gained 3 cents to $11.25 per million British thermal units. Heating oil added 2 cents to $1.72 a gallon.

Unleaded gasoline picked up 5 cents to $1.70 a gallon on expectations that motor fuel supplies will not be enough to meet demand. Gasoline inventories fell 1.2 million barrels last week, according to Energy Department data released Thursday. Storage inventories are 13 million barrels, or nearly 7%, below last year's level, raising concern among traders that refiners will be behind when they start rebuilding their inventories for the peak summer driving season.

Low trading volume, warm weather, expiring gasoline and heating contracts and funds closing out positions contributed to "choppy" or volatile trading sessions this week. Traders don't want to make big bets at the end of the year and risk losing their bonuses. Funds will likely return to the market next week and boost trading volume.

Prices are likely to calm down in coming weeks on a belief that the country has enough supplies to meet heating demand, particularly if the weather remains mild. Hedge funds and other speculators have been betting that crude and natural gas prices will drop, with a net 16, 991 short contracts for crude, and a net 35,547 short bets for natural gas in the latest Commodities Futures Trading Commission's report for the week ended Dec. 20.

"Participants will need to see a sustained bout of cold before they can anticipate enough demand to start bidding up prices," said Mike Fitzpatrick, vice president of risk management at Fimat USA in New York.

The Northeast, which uses three-quarters of the country's heating fuel, has been enjoying warmer weather for the past week, although that is expected to change. A snowstorm will first bring a mix of rain and snow to the Great Lakes and Upper Midwest, and then move into the Northeast with freezing rain, snow and rain on Saturday. Temperatures are expected to dip into the 30s, AccuWeather, a State College, Pa.-weather forecaster, said.

Still, cold temperatures are not expected to last. The National Weather Service projects warmer-than-normal temperatures will blanket much of the country through Jan.7.

Warm weather has helped preserve inventories for colder days ahead. Crude supplies rose by 100,000 barrels last week thanks to high petroleum imports and mild temperatures. There is now 12.6% more crude in storage than the same period last year.

Oil prices have risen 37% this year. A new crop of energy speculators has bid up prices amid growing overseas demand and hurricane-related outages in the Gulf of Mexico. Prices peaked at $70.85 a barrel on Aug. 30, the day after Hurricane Katrina hit the Gulf Coast and shut down much of the region's oil and gas production, and have averaged around $56 per barrel. Around 28% of the Gulf Coast's oil output is not operating and 20% of gas production remains offline.

"The potential problem this winter is not the gas in storage but rather the gas not in production," said Jim Williams, an energy economist at WTRG Economics in London, Ark.

High prices, low demand, conservation, and power plants switching between oil and gas should be enough to balance out lost production, he said.

The Nymex closed at 1 p.m. EST Friday instead of at 2:30 p.m. and will remain closed on Monday in observance of New Year's Day.

In company news, ConocoPhillips(COP Quote), Amerada Hess(AHC Quote)and Marathon Oil (MRO Quote) announced at the end of trading Thursday they would restart oil and gas production in the Waha concessions in Libya. Shares of Marathon rose 0.7% to $61.13; Amerada increased 1.3% to $127.32, and ConocoPhillips climbed 0.8% to $58.14 on news of the deal.

The Libyan National Oil Corp. will hold a 59.16% stake in the concession, Marathon and ConocoPhillips will each hold a 16.33% stake and Amerada will have a 8.16% interest. The companies will pay $1.3 billion to extend the concession for 25 years through 2031-34. The concessions produce 350,000 barrels of oil per day and cover almost 13 million acres.

Other oil-related stocks were narrowly mixed. Exxon(XOM Quote) gained 0.04% to $56.26; Chevron(CVX Quote) gained 0.7% to $56.88; Halliburton(HAL Quote) rose 1.2% to $62.15; Valero(VLO Quote) fell 0.8% to $51.21; and Schlumberger(SLB Quote) advanced 1.1% to $97.95.

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