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Crude Closes Below $62 a Barrel

The International Energy Agency sees supplies growing this year.

Updated from 12:10 p.m. EST

Energy prices declined Friday as traders digested a report suggesting that oil production is rising fast enough to eclipse demand.

The International Energy Agency, a Paris-based energy watchdog, said the Organization of Petroleum Exporting Countries will increase its capacity by 1 million barrels per day this year. Non-OPEC countries will see their output climb 200,000 barrels per day to an average of 51.45 million barrels.

The increase in output comes at a good time. According to the IEA, world oil demand will grow by 1.78 million barrels per day in 2006, down from its previous projection of 1.83 million barrels per day, as the Chinese and U.S. economies expand. The Chinese economy grew 3% in December and is likely to expand 5.8% this year.

"Total capacity growth should outpace demand," the IEA, which is composed of 26 member nations, said in its monthly oil market report. "This should lead to a rise in either spare capacity or, if OPEC decides to elevate production, a build in stocks."

Light, sweet crude for March delivery lost 78 cents to $61.84 a barrel, capping a week in which it fell 5%. Crude has lost all the gains it picked up this year and is back at December prices thanks to sufficient supplies and the dissipation of worldwide tensions. Iranian and Russian officials are meeting next week to hammer out a compromise over Tehran's vow to restart nuclear development. A solution would allow Iran to avoid a possible trade embargo.

Traders have been focused on the possibility of supply cuts even if they have yet to materialize because there is so little capacity in the world. Any hints of inventory cuts or demand spikes tend to drive up prices. Until more oil is brought online, the markets will likely remain volatile.

This week's inventory report from the Department of Energy helped energy bears, showing stocks of crude are 10.7% higher now than last year. There is 1.7% more gasoline in storage and 12.4% more distillates, which include heating oil and jet fuel, than the same period last year. Traders intently follow the agency's weekly reports because they give an inside look on the country's petroleum supply and demand.

"The specter of progressively higher inventories is blunting the impact of geopolitical tensions, making it harder for the market to climb the proverbial wall of worry," said Edward Meir, an energy analyst with Man Financial in Darien, Conn. "This is not to minimize the importance of the events swirling around us, but merely to suggest that they will now have to hit the markets with more urgency than they have in the past."

Natural gas closed down 16 cents to $7.31 per million British thermal units on plentiful supplies. Prices have fallen 32% since the beginning of the year. There is 22% more natural gas in storage now than last year thanks to mild weather and reduced demand for heating fuel. Utilities keep extra natural gas in underground caverns during the winter because there is not enough pipeline capacity to carry all the fuel needed around the country.

Plentiful supplies offset predictions of cold weather and drove down heating oil 2 cents to $1.64 a gallon in trading Friday. The contract lost 8% this week. Snow is projected this weekend for the Northeast, the country's largest consumer of heating fuels, and below-normal temperatures will likely cover much of the country through mid-February, according to the U.S. Climate Prediction Center. Still, many traders say it's too little and won't make much difference to prices in the long term.

Unleaded dipped 5 cents to $1.46 a gallon, and has lost 13% this week. Thanks to robust supplies and low seasonal demand, unleaded has dropped to November price levels.