Updated from 12:52 p.m. EST
Oil prices ended about where they started Tuesday as traders prepared for builds in the Energy Department's weekly inventory numbers.
After rising early, crude for February delivery reversed direction and fell 15 cents to end trading at $63.35. The contract had been rising on an inflow of money from hedge funds and concerns that Iran will resume nuclear research after two years.
As consumers turned down their furnaces last week, distillate stocks, which include heating oil and diesel, probably rose by 1.5 million to 3.5 million barrels, analysts say. Natural gas inventories should decline by 10 billion to 55 billion cubic feet, according to analysts polled by
. Although natural gas stocks are likely to have fallen last week, the draw is smaller than usual at this time of year.
Estimates for crude stocks were all over the map, with
and IFR Markets predicting a decline of 600,000 barrels to 3 million barrels. Wachovia and Fimat USA were calling for increases of around 1 million barrels. Gasoline stocks probably climbed 1.7 million barrels.
The Energy Department's weekly petroleum supply reports are due out Wednesday at 10:30 a.m.
Crude prices have been buoyed by speculative inflows in the past week as hedge funds and other speculators, eager to make money off the rise in energy prices, have put funds to work in commodity markets. Last week, February crude rose more than 5% as trading volume hit a high of 130,635 contracts, compared to an average of 70,200 contracts for the week of Dec. 30. Open interest, or the number of option contracts that have been traded but not liquidated, rose Monday by 15,000 to 887,927.
Geopolitical events typically drive energy prices and Iran's move to resume nuclear research had that effect in early trading Tuesday. After two years of voluntary suspension, Iran removed seals placed by the International Atomic Energy Agency on its nuclear research facilities,
reported. Iran has said that the research is aimed at producing energy and not nuclear weapons. The U.S. and Europe have condemned the move and raised the possibility of economic sanctions from the United Nations.
Energy prices should remain high through 2006 thanks to rising worldwide oil demand and growing Asian economies, the Energy Department said in its short-term outlook released Tuesday. Demand for oil around the world should climb from 1.2 million barrels per day to 1.6 million barrels largely because domestic demand will recover and rise by 410,000 barrels a day.
On Tuesday, natural gas futures slid 30 cents to $9.33 per million British thermal units to levels not seen since Hurricane Katrina shut down most of the Gulf of Mexico's petroleum output. The hurricanes had an outsized effect on natural gas prices because unlike oil and refined products, virtually all natural gas is produced in North America. Used to generate electricity and heat, natural gas has been declining this week on warmer weather. Natural gas prices are sensitive to the weather and rise and fall on daily forecasts.
Temperatures are projected to be above normal in the Northeast and Midwest, which use much of the country's heating fuel, through next week, the National Weather Service said in its six- to 10-day outlook.
Natural gas prices have grown more sensitive to the weather as factories and utilities reduced their consumption. From 1999 to 2004, industrial consumers cut their usage by 18%, according to figures from the Energy Department.
"Yes, we've had warm temperatures, but the bigger issue is demand destruction," said Mike Reed, vice president of research and analysis for ICAP Energy in Louisville, Ky.
From November through March, the winter heating season, Reed estimates industrial demand will fall by 770 billion cubic feet while residential demand declines by 135 billion cubic feet. Lost petroleum production in the Gulf of Mexico will amount to 276 billion cubic feet.
Many utilities and factories have shaved or cut their consumption of natural gas as prices have more than quadrupled over the past decade. In an October survey of 31 large manufacturers, the majority said they would cut their use this winter from 5% to 40%, according to the Industrial Energy Consumers of America.
"The survey clearly indicates that industrial natural gas demand destruction has accelerated as a result of high prices," said Paul Cicio, the executive director of the Industrial Energy Consumers of America of Washington, D.C.
Unleaded gasoline and heating oil each lost 3 cents to close at $1.73 a gallon on warmer weather and concerns heating demand will drop. National demand for heating fuels is projected to drop 34% below normal this week, and in the Northeast, demand will be down 50%, according to the National Weather Service. Consumers will cut their need for natural gas by 34% and electric heat by 38%.
In trading, the Amex Oil Index was increasing 0.9% and the Philadelphia Oil Service Sector Index was climbing 1.8%. Shares of
were moving up 0.1% to $59.01;
was essentially unchanged at $68.12; and
was inching up 0.4% to $59.66.