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Dive in Natural Gas Continues

An unexpected build in gas inventories sparks selling.

Updated from 11:59 a.m. EST

Natural gas fell to its lowest level since Hurricane Katrina Thursday after a government report showed an unexpected increase in inventories last week.

Natural gas futures slid 69 cents to $9.49 per million British thermal units after the Energy Department said storage inventories rose by 1 billion cubic feet last week. Analysts had called for a decline, the traditional trend during heating season. Mild weather evidently drove up inventories of the fuel, which is used to generate electricity and heat.

Utilities store gas supplies in more than 400 underground reservoirs and caverns and withdraw the fuel from November through April. During the winter, heating demand typically exceeds domestic production and pipelines can't transport enough fuel to meet demand.

Rumors have been circulating that the natural gas inventory numbers were inaccurate and that some of the figures may have been misreported. But Energy Department officials said there were no mistakes and that an announcement would have been released at 1 p.m. EST if there had been.

"There has not been a revision," said William Trapmann, an industry economist at the Energy Department who puts out the weekly report.

Natural gas supplies can differ from analyst expectations because of pipeline problems, shipment times and the weather.

"Pipeline pressure swings and other timing issues can easily result in deviations from what is expected," wrote Kyle Cooper, vice president in futures and fixed income for Citigroup Global Markets in Houston, in a note to clients.

Motor fuel inventories, despite increased gasoline demand, rose by 1.4 million barrels to 204.3 million barrels (that's 6% below the level this time last year). Inventories of distillates, which include heating oil and diesel, climbed 2%, or 2.1 million barrels, to 128.9 million barrels. An increase in diesel made up for a decline in heating oil.

Unleaded gasoline gained 1 cent to $1.78 a gallon and heating oil fell 3 cents to $1.78 a gallon.

February crude lost 63 cents to close at $62.79 per barrel after the Energy Department said inventories dropped by 1 million barrels last week, within the range of analysts' expectations. Crude stocks are now 12.5% higher than the same period last year even though petroleum imports were down 131,000 barrels per day to 10.1 million barrels.

Refineries operated at about 90% of their capacity last week and processed over 15.2 million barrels per day, an increase of 155,000 barrels. The increase came despite shuttered petroleum production in the Gulf of Mexico. Nearly 27% of the gulf's oil output and 19% of natural gas production is shuttered, the U.S. Minerals Management Service, which oversees offshore drilling, said in a report Thursday. Two refiners are still closed, but one is projected to resume operations in the next week.

Despite robust supplies and moderate weather, crude prices had been rallying because of an inflow of new money into the energy markets.

"We're seeing all kinds of fresh money coming and its looking for a new home right now," said Peter Beutel, president and energy analyst at Cameron Hanover, an energy risk management firm in New Canaan, Conn. "But I don't see any fundamental reason for crude to reach August heights again."

In 2005, money invested in commodity funds rose to about $80 billion, an increase of $25 to $30 billion, as pension funds and money managers looked to diversify beyond stocks and bonds,

Bloomberg

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reported. This year funds that track the energy market are expected to climb 38% to $110 billion, according to a Barclays Capital Jan. 3 report.

The National Weather Service, in its 6-to-10 day outlook released Wednesday, said the country will experience warmer-than-average temperatures through Jan. 14. Above normal amounts of rain is expected in the Northeast, while the central states will have less than normal amounts of precipitation. Traders look to the government forecast to determine near-term demand for heating and resulting price hikes or declines.

Meanwhile, in trading Thursday the Amex Oil Index was losing 1.1% and the Philadelphia Oil Service index was falling 2.1%. Energy stocks, like

ExxonMobil

(XOM) - Get Exxon Mobil Corporation Report

fell 0.6% to 58.22;

Total

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dipped 0.7% to $129.49, and

Royal Dutch Shell

(RDS-A)

declined 1.1% to $63.94.

ConocoPhillips

(COP) - Get ConocoPhillips Report

slid 0.7% to $59.57 after the super major said its oil and gas production in the fourth quarter will be 1.6 million barrels higher than the third quarter because of completed maintenance in the North Sea and unplanned downtime in Alaska. Fourth-quarter exploration expenses are estimated at $220 million due to increased dry-hole costs and other expenses, and 2005 expenses are anticipated at $650 million.

Shares of

Marathon Oil

(MRO) - Get Marathon Oil Corporation Report

lost 0.3% to $65.88 after the company said it expects to pump between 385,000 and 390,000 barrels of oil per day during the fourth quarter. Production available for sale is expected to be at the high end of previous guidance of 350,000 to 370,000 barrels per day.

Fourth-quarter sales are up over the previous quarter because of seasonal gas sales and the restoration of production in the Gulf of Mexico. Marketing margins per gallon will more than double over the same period last year because of strong refining and wholesale margins and wider differences between sweet and sour crude.