Oil Prices Keep Falling

Iran's decision to cancel diplomatic talks with Russia fails to lift the March contract.
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Updated from 12:19 p.m. EST

Crude prices fell to a six-week low Monday despite Iran's cancellation of diplomatic meetings with Russia over a plan to enrich uranium on its behalf.

Light, sweet crude for March delivery closed down 60 cents, or 1%, at $61.24 a barrel on Nymex. High inventories and the easing of world tensions have pushed down the price of oil more than 2% this year. Traders typically bid up energy prices on geopolitical tensions, expecting supplies will be cut.

Much of the political focus has been on Iran, whose decision in January to restart a nuclear research program spooked oil markets by raising the specter of economic sanctions.

In an effort to ease those tensions, Russia offered to enrich uranium for Iran. On Monday, talks toward that solution were reportedly put on hold. Tehran also said Monday that it may withdraw from the Nuclear Nonproliferation Treaty if membership interfered with its nuclear plans.

Traders have been selling down oil because the threat of reduced supplies is not as great as it was a month ago. At that time, Nigeria's petroleum output was down 10% due to rebel attacks on its petroleum infrastructure, and the International Atomic Energy Agency was still mulling over the possibility of referring Iran to the U.N. Security Council for possible trade sanctions.

"The selling of the past several weeks is less a reflection of participants' refocusing on fundamentals so much as it is the diminution of the threat to energy security," says Michael Fitzpatrick, vice president of energy risk management with Fimat USA in New York.

Robust supplies have also alleviated some of the pressure on oil prices. Oil-producing countries will increase their capacity by 1.2 million barrels per day this year, eclipsing a pickup in demand, the International Energy Agency said last week. Crude inventories in the U.S. are also 10.7% higher than they were a year ago, and are expected to remain relatively high.

Despite a weekend blizzard in the Northeast, the country's largest heating fuel market, natural gas for March delivery dropped 7 cents, or 1%, to finish at a seven-month low of $7.24 per million British thermal units. The contract rose briefly during trading Monday, but then fell after traders bought back their contracts. Short-traders sell a contract in expectation prices will go down and then buy it back at a lower price or "close out their position."

Natural gas has lost 36% this year amid plentiful supplies and mild weather. There is currently 22% more natural gas in storage than last year because much of the country has enjoyed above-average temperatures. Utilities store natural gas in more than 400 underground caverns around the country because there is not enough pipeline capacity to carry all the fuel during the winter.

Cold weather is expected to cover much of the country through Feb. 22, the U.S. Climate Prediction Center said, but is coming too late to deplete inventories and drastically affect natural gas prices. The winter heating season typically lasts through March. Half of traders and analysts polled in a

Bloomberg

survey said gas futures will drop this week.

A sustained bout of frigid temperatures is probably the only thing that would drive natural gas prices back up. The contract has lost nearly 50% since the beginning of the heating season in October.

"It will take a few weeks of higher-than-average withdraws to fortify this market," says Bill O'Grady, a futures analyst with AG Edwards in St. Louis.

Hedge fund managers and other speculators are betting natural gas prices will continue their slide, raising their short positions by 3% to 92,870 for the week ended Feb. 7. There were 53,103 long positions for the week. Shorts have outweighed long positions since the start of September.

High supply levels are keeping prices of unleaded gasoline and heating oil low. Heating oil lost less than 1 cent, or 0.2%, to $1.63 a gallon, its lowest level since late December. Unleaded gasoline settled down 3 cents, or 2%, to a two-month low of $1.43 a gallon. There is 12.4% more distillate in storage and 1.7% more gasoline right now than at the same time last year. Distillates include heating oil.