Crude Ends Choppy Session Lower

Traders turn their focus to tomorrow's inventory report.
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Updated from 1:42 p.m. EST

Crude futures eased Wednesday as traders momentarily looked past geopolitical developments and scrambled to put down bets on tomorrow's report on fuel inventories.

February crude lost 58 cents to $65.73 a barrel after hovering around $66 for much of the Nymex session. On Tuesday, crude closed at $66.35, its highest level since Sept. 29 when it hit $66.79.

The rest of the energy complex followed crude lower, with natural gas closing down 47 cents to a five-month low of $8.69 per million British thermal units. Heating oil lost 3 cents to $1.75 a gallon and unleaded gasoline declined 5 cents to $1.77 a gallon.

While geopolitical developments remained a major concern in the market, traders appeared to be moving their near-term focus to the Energy Department's storage report, which could show higher crude inventories when it is released Thursday. The agency's inventory numbers are a day late this week because of the observance of Martin Luther King Jr. Day.

Unseasonably warm weather has shaved heating demand and boosted inventories. Analysts project distillates, which include heating oil, probably rose by 2 million barrels, while natural gas, used to generate heat and electricity, likely fell by between 10 billion and 58 billion cubic feet, according to

Reuters

estimates. During the winter heating season, natural gas drawdowns are typically much larger.

Estimates for crude ranged from a draw of 100,000 barrels in a

Reuters

survey to a gain of 2 million barrels from Citigroup World Markets.

Despite the pullback in prices, tensions still remained high over Iran's plans to resume nuclear research. On Wednesday, Iran requested more negotiations with the European Union, but France and the U.S. rejected the proposal and have moved ahead with plans to refer their dispute to the U.N. Security Council. Economic sanctions against Iran, which resumed nuclear research last week after a two-year hiatus, have been floated. Iran says its research is focused only on nuclear power; European and U.S. officials fear something more sinister.

Iran is the second-largest producer in the Organization of the Petroleum Exporting Countries and pumps 3.9 million barrels of crude per day, or roughly 13% of the group's total. If Iran were cut off, OPEC would not be able to make up the difference because it has little spare capacity.

Some traders are speculating that skyrocketing oil prices could "kick the economy into a recession," said Phil Flynn, vice president and energy analyst at Alaron Trading in Chicago. "Those fears are based on the assumption that either the situation in Iran or possibly Nigeria will kick the world into oil supply deficit mode."

Nigeria, where rebels have recently stepped up attacks on oil interests, is the fifth-largest crude supplier to the U.S. and Africa's largest exporter.

Royal Dutch Shell

(RDS-A)

said Wednesday that an offshore platform would not be able to meet its export commitments of 115,000 barrels per day. The supermajor's total production cuts in Nigeria now stand at 221,000 barrels per day or 9% of the country's total output.

Although militant attacks on Nigeria's oil infrastructure began in late December, the disruptions were attracting more attention now because traders are worried about overall crude supplies.

"The Nigerian news would typically not get much of a market hearing given the modest amounts usually involved and the relatively short-lived nature of disruptions," said Edward Meir, an energy analyst with Man Financial. "However, given the potential crisis with Iran, markets are moving higher on just about any news that entails a possible supply pinch."

An inflow of new money from pension and hedge funds and upbeat economic news also fueled the spike in prices Tuesday. Open interest, or the number of option contracts that have been traded but not liquidated, increased last week by 43,081 to 892,949. Industrial production rose 0.6% last month and the amount of capacity factories used hit 80.7%, the highest level since October 2000, according to the

Federal Reserve

.

In trading Wednesday,

Exxon Mobil

(XOM) - Get Report

fell $1, or 1.7%, to $60.52;

Halliburton

(HAL) - Get Report

lost 81 cents, or 1.2%, to $69.19;

Valero

(VLO) - Get Report

declined $1.44, or 2.4%, to $58.73;

Chevron

(CVX) - Get Report

fell $1.14, or 1.9%, to $60.72, and

ConocoPhillips

(COP) - Get Report

dipped $1.41, or 2.2%, to $62.88.

El Paso

(EP)

, an oil and natural gas distributor, declared a three-year turnaround complete and set financial targets for 2006. The Houston-based company said it expects earnings per share of 95 cents to $1.05, free cash flow of $400 million and a $1 billion capital budget. Net debt is projected at $14 billion, $1 billion to $2 billion away from earning an investment-grade rating.

The goals assume $60 a barrel for crude and $8 per million British thermal units for natural gas. El Paso shares lost 7 cents, or 0.6%, to $13.22 on the news.