Warm Weather Slams Crude

Prices fall as more warm weather moves into the Northeast.
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Updated from 3:21 p.m. EST

Energy prices continued their reversal Monday on forecasts for warmer-than-average winter weather.

Crude for January delivery closed down $1.41 to $57.30 per barrel, while heating oil dropped over 5 cents to $1.63 a gallon. Unleaded gasoline lost almost 4 cents to $1.41 a gallon, a six-month low.

Natural gas fell less than 1 cent to $11.40 per million British thermal units as the contract for December delivery expires Monday.

Mild weather will reign along the East Coast through Tuesday, with temperatures soaring into the 60s and 70s in the Ohio Valley and Middle Atlantic, and the 50s in southern New England. A cold front will return to the East Coast Tuesday night and Wednesday, AccuWeather, a State College, Pa.-based weather forecaster, said.

Comments from Middle Eastern oil producers weren't helping the bulls. Saudi Arabian Oil Minister Ali Naimi said oil markets were balanced and inventories were at a comfortable level, as he arrived in Kuwait for a meeting of Gulf Cooperation Council oil ministers and European Union energy officials, Platts reported.

Falling prices were also supported by increases in supplies of crude, gasoline and heating oil for the week ended Nov. 18, the Energy Department reported last Wednesday. Crude inventories rose by 354,000 barrels last week, while unleaded gasoline rose by 238,000 barrels and distillate stocks added 1.17 million barrels. Warmer-than-normal temperatures have allowed power plants to add to their supplies for nearly two months.

"You really need early winter cold to draw down supplies," said Tim Evans, senior energy analyst with IFR Markets in New York. "We still haven't gotten that."

Last week, cold weather helped oil prices recover from their five-month low of $55.40 on Nov. 18 to clear $58 a barrel. The fall in prices comes as more of the Gulf of Mexico's oil and gas platforms return to production after suffering extensive damage in Hurricane Katrina. About 69% of the region's gas production is now working, while 60% of oil output has returned, according to the Minerals Management Service, which oversees offshore oil and gas production, said Monday.

A spate of long-term warm weather has driven down front-month crude prices from a high of $70.85 on Aug. 30, a day after Hurricane Katrina hit the Gulf of Mexico and shuttered much of the region's oil and gas production. The storm also drove up prices right as energy demand and refinery capacity was stretched thin. In September, the Organization of the Petroleum Exporting Countries, whose members pump about 40% of the world's oil, suspended its self-imposed output quotas to drive down prices and help consumers in the wake of the hurricane. It was the first time the group deferred quotas since the Gulf War.

For the past 10 weeks, hedge funds and other speculators have bet that oil prices will fall. There were 56,168 short positions on Nymex for the week ended Nov. 15, according to the Commodity Futures Trading Commission, which oversees domestic commodity futures and options markets. Not surprising, oil companies and investment banks, who have a lot to gain from a run-up in oil prices, were overwhelmingly betting long, or that prices would go up. There were 70,654 more long positions for commercial traders, at 543,858 positions.

Any number of things could send prices higher: an OPEC production cut; a calamity in the Middle East; or a spell of frigid temperatures in the Northeast, which is the largest domestic consumer of heating oil. Many analysts are of the belief prices have bottomed, although they disagree about when the next rally will begin or how powerful it will be.

Although OPEC has said it won't defend energy prices with a production cut at its next meeting Dec. 12, many analysts don't seem to believe the group's assertions that it will maintain output as is.

"OPEC doesn't want oil to fall below $55," said Kevin Kerr, president of Kerr Trading International in New York. "They've made a lot of headway in getting people to accept these high prices. Why would they give it up?"

Earlier this month, OPEC said its member countries will have to pump more oil during the fourth quarter to meet higher demand. The group will have to pump 30.32 million barrels of oil a day -- 276,000 barrels a day more than was previously estimated, the group said in its monthly oil report Nov. 16.

OPEC expects oil demand to rise 1.8%, or 1.5 million barrels a day, to 84.8 million next year due to a rebound in Chinese demand and a better economic outlook for the U.S. and Pacific countries.

Rising demand has pushed oil giants to increase or re-start production at oil and gas fields worldwide.

Total

(TOT) - Get Report

and

Royal Dutch Shell

(RDS-B)

will start pumping crude oil from its Bonga deepwater oil and gas field in Nigeria and expects to hit 225,000 barrels of oil and 150 million cubic feet of gas per day "as soon as possible." The oil field, located about 75 miles off the coast of Nigeria, will cost $3.6 billion to start production, the oil giants said Monday.

British Petroleum

(BP) - Get Report

will use some of its profits from the booming energy market to invest in a new company, BP Alternative Energy, focusing on wind, hydrogen, solar and carbon-abatement technology. The oil major will invest up to $8 billion over the next 10 years, with about $1.8 billion spent over the next three years, BP said Monday.

In trading Monday, warm weather was affecting the oil majors, with

Exxon-Mobil

(XOM) - Get Report

closing down 2.3% to $58.74;

Chevron

(CVX) - Get Report

falling 2.3% to $57.18, and

British Petroleum

(BP) - Get Report

dipping 2.5% to $66.11. Total inched down 2.1% to $125.48 and Royal Dutch Shell was down 1.5% to $65.30.

Domestic energy markets were closed for trading on Thursday and Friday because of the Thanksgiving holiday.