Crude Futures Take a Dip

The decline comes even as Nigeria and Venezuela say they will cut output.
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Updated from 11 a.m. EDT

Oil futures shed nearly $2 Monday as traders focused on brimming domestic fuel inventories and discarded the news of production cuts in Nigeria and Venezuela.

Light, sweet crude for November delivery gave back $1.88 to close at $61.03 a barrel on the New York Mercantile Exchange. Wholesale unleaded gasoline lost 4 cents to $1.50 a gallon, and heating oil inched down 5 cents to $1.70 a gallon.

Natural gas eked out a 2 cent-increase to $5.64 per million British thermal units after slipping more than 4% last week. In September, the fuel dropped 32% as hurricanes and tropical storms spared the Gulf of Mexico, demand was muted and inventories were high.

Trading was thin and volatile throughout the session because some traders took the day off for the Jewish holiday of Yom Kippur.

Meanwhile, Nigeria and Venezuela have pared crude production beginning this month in a bid to shore up sluggish prices, but traders largely ignored the move because the two already produce well below their OPEC-mandated production limits. On Sunday, Iran said it supported the cut but did not announce its own.

Nigeria has trimmed output by 5%, or 120,000 barrels a day, and Venezuela has cut daily production by 50,000 barrels. During August, Venezuela pumped 2.5 million barrels, below its daily limit of 3.2 million barrels. Nigeria produced 2.2 million barrels a day in August, according to

Bloomberg

.

To control world crude prices, OPEC sets output quotas among its members. Unless OPEC's biggest members, such as Saudi Arabia or Iran, trim production, energy prices are unlikely to rise much on the cuts.

Nigeria, the world's eighth-largest crude producer, is already pumping as much as 800,000 barrels less each day in the wake of ongoing rebel attacks on the country's pipelines and drilling platforms. Militants have been targeting the energy industry to pressure the government to give them a share of the country's oil revenue.

Oil prices were volatile last week as speculation swirled as to whether the Organization of Petroleum Exporting Countries had informally agreed to slash production. The group, which consists of 11 member countries that control around 40% of the world's crude, has said it would defend crude prices of $60 a barrel.

However, when oil prices dipped below that level last week, some members announced individual cuts. The group as a whole, though, hasn't announced any reductions.

European and Iranian diplomats are set to meet again this week to negotiate Tehran's refusal to curtail its nuclear program. The five permanent members of the U.N. Security Council and Germany may also discuss Iran later this week.

Thus far, Secretary of State Condoleezza Rice said, "we have not heard anything that suggests that the Iranians are going to suspend

atomic research,"

Reuters

reported. Iranian President Mahmoud Ahmadinejad has also publicly said he does not support halting uranium enrichment.

Energy traders have been fixated on the impasse with Iran since February, when Tehran restarted enrichment after a two-and-a-half-year hiatus. Iranian officials maintain they need the extra power to generate electricity, while the West believes Tehran wants enriched uranium to build atomic weapons.

Regardless what happens with Iran, the world's fourth-biggest crude producer, and possible OPEC production cuts, domestic supplies are higher than last year. Compared to last year, distillates, which include heating oil, are 15% higher; gasoline stockpiles are 9% greater, and crude supplies are up 5%.

The reopening of the eastern half of the Prudhoe Bay oil field -- the largest in the U.S. -- earlier than expected has also boosted supplies and dampened prices. The federal government granted

BP

(BP) - Get Report

, the operator of the site, approval to reopen the eastern half last week. Total production is now above 400,000 barrels per day.

ConocoPhillips

(COP) - Get Report

and

Exxon Mobil

(XOM) - Get Report

, which also have stakes in Prudhoe Bay, plan to resume oil shipments from the field this month.

Meanwhile, in trading Monday, energy shares were shedding gains, with drillers and refiners on the Amex Oil Index down 0.7%. Oil service firms on the Philadelphia Oil Service Index were slipping 2.4%.

Drillers and refiners

Anadarko Petroleum

(APC) - Get Report

,

Occidental Petroleum

(OXY) - Get Report

and ConocoPhillips were leading the declines, each down as much as 1.9% each.

Oil service companies

GlobalSantaFe

(GSF)

,

Smith International

(SII)

,

National Oilwell Varco

(NOV) - Get Report

and

Nabors Industries

(NBR) - Get Report

were posting the largest drops, down from 3% to 4% each.