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Crude oil drops almost $3 on mild weather, forecast

NEW YORK -- Crude oil prices started 2007 trading by plunging 4.5 percent yesterday, as persistent mild weather in the United States led traders to bet on lagging demand for heating fuels.

Light, sweet crude for February delivery on the New York Mercantile Exchange fell $2.73 from Friday's settlement price to a six-week low of $58.32 a barrel.

The Nymex trading floor was closed Monday for New Year's Day and Tuesday for the memorial service for former US President Gerald Ford.

Forecasters say the warmer-than-normal temperatures in the US Northeast -- the biggest heating oil-consuming region -- will continue through January.

"That's going to put heating oil distributors around the country in pretty bad shape," said Mike Fitzpatrick, a vice president for energy risk management at Fimat USA.

Traders were pulling down prices near the low levels they reached late in 2006: "If those are breached, they can fall a long way," Fitzpatrick said.

On Nov. 17, the crude contract closed at $55.81 a barrel, the lowest settlement since June 15, 2005.

Crude hasn't settled above $64 a barrel since September, in what's become a largely weather-driven market in recent years: surging to $70 a barrel for the first time in 2005 as Hurricane Katrina ravaged the Gulf Coast, breaking above $78 a barrel in July 2006 on worries of another bad storm season, and then sinking to $60 a barrel when those expectations weren't met.

The front-month crude contract finished 2006 at $61.05 a barrel -- a penny above where it ended a year earlier.

This year's mild winter has arrived against a backdrop of ample global crude inventories, slowing economic growth in the United States, and a production spurt from non-OPEC countries.

The selling in the energy market is also due to a cooling off in the commodities boom, said Tim Evans, energy analyst at Citigroup Global Markets.

"You do have weather as one element in the story, but it also just looks like there is a broader flow of selling around the commodity world today," Evans said, pointing to corresponding drops in metals and grains prices yesterday. "It's a pretty consistent picture that investors just don't want to own commodities at the moment."

Analysts are split on whether crude oil prices will stay below the 2006 average of about $66 a barrel or rise to new heights this year. Arguments for the latter forecast include ballooning energy demand in some parts of the world, including China; threats of production cuts by OPEC; and ongoing political turmoil in oil-producing regions, such as Nigeria and the Middle East.

It was unclear if yesterday's sharp decline is the beginning of a long-term downtrend, or merely short-term weakness. Evans said prices have to potential to rebound, given that at this time last year prices surged on worries about violence in Nigeria and Iran's nuclear capabilities: "Both of those situations are somewhat more critical today than they were a year ago," Evans said.

The Organization of Petroleum Exporting Countries' concerns that high global stockpiles and sluggish demand would cause prices to drop led it to a 1.2 million barrel-a-day output cut in November and a further 500,000 barrel-a-day cut starting Feb. 1.

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