Crude Grinds to Lower Close

Trading is volatile as several fuel contracts near expiration.
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Updated from 11:56 a.m. EST

Oil prices churned lower in a volatile session Tuesday as traders sold positions ahead of another key inventory report from the Energy Department.

Crude for January delivery closed down 86 cents to $56.50 a barrel, while natural gas gained 10 cents to $11.73 per million British thermal units. Heating oil lost almost 3 cents to $1.60 a gallon and unleaded gasoline fell 2 cents to $1.39 a gallon. The December contracts for heating oil and gasoline expire Wednesday.

Despite a short-lived cold blast last week, traders are girding for a rise in heating oil stockpiles when the Energy Department releases its weekly petroleum report Wednesday at 10:30 a.m. EST. In a

Dow Jones

survey, 10 analysts expect distillates to rise 595,000 barrels and gasoline to increase by 755,000 barrels. Crude is expected to fall by about 220,000 barrels because refineries are increasing their operating rates by 0.9 percentage points.

In another Energy Department storage report on Thursday, analysts are expecting a draw of between 40 to 61 billion cubic feet of natural gas because of last week's cold blast. The withdrawal was 8 billion cubic feet in the agency's report last Wednesday.

"This is the most difficult-to-handicap market that I've ever seen," said Matt Conlan, an oil analyst with Weeden & Co., an equity trading firm in Greenwich, CT. "Not only do you have an extended shoulder season, but on the supply side, you have continued disruptions in the gulf that have been offset by supplies from overseas and the strategic petroleum reserve." (The "shoulder" season is what traders call the period of moderate temperatures between fall and winter.)

As winter begins, weather plays a larger role in the energy markets. The warm weather of the previous month has had a bearish impact on the energy complex, briefly sending front-month crude to a five-month low early last week.

"Unfortunately, it's all about weather in November and December," said David Pursell, a macro energy analyst at Pickering Energy Partners in Houston.

The East Coast has been enjoying mild weather, with temperatures in the 50s and 60s, but that should change Tuesday night and Wednesday as a cold front arrives. By Wednesday, temperatures will be in the 40s and 50s in the Northeast, AccuWeather, a State College, Pa.-based weather forecaster, said. The National Weather Service expects below-normal temperatures in the Midwest and East Coast, with above normal temperatures in the West, according to its six-to-10-day forecast released Monday.

Warmer-than-normal winter temperatures in the Northeast, which uses three quarters of the country's heating oil, have offset lower production capacity in the Gulf of Mexico. Hurricane Katrina and Rita knocked much of the area's gas and oil rigs and platforms offline and about 30% of the region's gas and 38% of oil production still remains inoperative, according to the Minerals Management Service on Tuesday, which oversees offshore oil and gas production.

Energy indices and stocks were mixed in recent trading, with the Amex Oil Index rising to 0.03% and the Philadelphia Stock Exchange Oil Service Index adding 0.06%.

Chevron

(CVX) - Get Report

gained 0.3% to close at $57.37, and

Valero

(VLO) - Get Report

climbed 0.1% to $95.40.

Halliburton

(HAL) - Get Report

lost 0.8% to $62.41;

ExxonMobil

(XOM) - Get Report

was down 0.7% to $58.34, and

BP

(BP) - Get Report

fell 0.1 % to $65.97.

In corporate news, West Coast power producer

Calpine

(CPN)

ousted its two top executives Tuesday and named onetime

Chevron

(CVX) - Get Report

head Kenneth Derr chairman and interim CEO. The stock tanked 27% to 91 cents.