Oil below $56 after plunge on stock build, weather

Date: Friday, January 5, 2007
Author: Cho Mee-young, Za.today.reuters.com

SINGAPORE (Reuters) - Oil prices held below $56 on Friday after falling nearly 9 percent over the past two days to its lowest close in 18 months, as traders fret over growing U.S. fuel stocks and mild weather.

The hefty losses in oil as well as in other commodities also may have been triggered by funds switching into other assets.

U.S. light crude traded down 3 cents at $55.56 a barrel by 0721 GMT, reversing its upward move in the earlier day.

The prices slided by $2.73 on both Wednesday and Thursday, marking the biggest two-day percentage drop since December 2004, and took the market to its lowest settlement since June 15, 2005.

London Brent crude shed 4 cents to $55.07 after dropping by $2.85 on Thursday.

"Weather is certainly a key driver of sentiment, but what has been set in motion is a far more general demand pessimism for the year ahead," said Barclays Capital.

"This has produced a market that is more sensitive than usual to any producer hedging, and which is inclined to attempt to break sharply lower."

Unseasonably mild weather in the U.S. Northeast, the top heating oil consumer region, and in Europe, has undercut demand for fuel, pulling down prices since late December.

U.S. government data on Thursday showed a 2 million-barrel rise last week in distillate stocks, including heating oil

Gasoline stocks rose by a hefty 5.6 million barrels, much more than the 1.5 million barrels forecast by analysts, overshadowing a 1.3 million-barrel fall in crude stocks.

The sharp price fall also raised market speculation that a hedge fund might be taking large losses on an oil position, similar to the huge natural gas bet that sank the multi-billion dollar Amaranth fund in 2006.

OPEC WARY

Bearish oil prices raised concern for some OPEC members.

A top Iranian oil official said on Thursday that OPEC was keeping an eye on fund activity in the markets, although OPEC's

supply cut of 500,000 barrels per day (bpd) from February 1, adding to a cut of 1.2 million bpd from November, should keep markets balanced until the 12-member group meets on March 15.

"We have to see whether the funds overreact... If that's the case, we may have to consider meeting (before March)," said Iran's OPEC Governor Hossein Kazempour Ardebili.

Some analysts said the impact of OPEC's supply cuts would be felt in the markets in the coming weeks.

"We expect that crude oil prices, after this week's whipping, will find more support in the weeks ahead, as crude stocks drift lower and we approach the beginning of February and greater clarity on OPEC's intentions for the next round of 500,000 bpd of production cuts," Martin King, analyst at First Energy Capital said in a report.

Coupled with hefty losses in oil, U.S. copper futures settled at a nine-month low, while the Reuters/Jefferies CRB Index, which measures prices of 19 commodity futures, closed near a 20-month low on Thursday.

However, weather forecasters said a stretch of unusual warmth in the eastern U.S. could end by mid-January. An Arctic air mass is likely to form over western Canada next week and seep into the U.S. Midwest before spreading into the East and Southeast by mid-January, forecasters said.