Oil prices drop to 18 month lows

05-Jan-07

Oil prices plunged by more than two dollars on Thursday to settle at their lowest level in eighteen months since June 2005. Light, sweet crude for February dropped US$2.73 to settle at US$55.59 a barrel on the New York Mercantile Exchange. This drop was triggered by a U.S. government report showing higher-than-expected inventories of gasoline, heating oil and diesel fuel amid warm winter temperatures. Demand for heating oil has been running 20-30% below normal for most of the past five weeks. Interestingly, the Western states have recently seen snow and freezing temperatures, and two major snow storms hit Colorado last week. But as about 80% of heating fuel demand comes from the densely populated Northeast and Midwest, an unseasonably mild winter in the Northeast and Midwest has led to a buildup in inventories and, as a result, weaker prices. If energy prices keep falling, OPEC may be moved to reduce oil production again. After oil prices began deflating last fall, the Organization of Petroleum Exporting Countries agreed to a 1.2 million barrel-a-day cut in crude output beginning in November and another 500,000 bpd cut set to begin Feb. 1.