Oil Prices Climb After Sharp Dip

BBC, January 5, 2007

Oil prices rose to some $56 a barrel, after seeing their sharpest drop in two years a day earlier. US light crude oil was 72 cents up at $56.31 a barrel in New York as London's Brent crude rose 53 cents to $55.64. Friday's reversal came after the government posted better-than-expected US job figures for December, improving the broader economic outlook.

Prices fell by more than $2 a barrel a day earlier after mild US weather cut demand for petrol and heating oil. Mild weather in the North East, the top heating oil consumer region, and in Europe has cut demand for fuel, bringing down prices since late December.

"The jobs data out this morning seems to have lifted the pall and changed the outlook for the economy," said John Kilduff, at Fimat USA.

Demand Pessimism
The US energy department said stocks of distillates rose by two million barrels in the last week of 2006.

As well as the energy department data, the government released figures showing that petrol stocks rose by 5.6 million barrels in the last week of December - considerably higher than the 1.5 million barrels expected. We expect that crude oil prices, after this week's whipping, will find more support in the weeks ahead 
Martin King, First Energy Capital

The price of oil has fallen sharply since peaking above $78 a barrel in July, despite the Opec cartel of oil producing countries threatening to trim its output. Analysts are now waiting to see what impact the output decision by Opec, to cut output by an extra 500,000 barrels per day (bpd) starting from 1 February, will have.

The drop in oil prices comes as other commodities have also fallen in price. "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 in a note.

"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." There is also market speculation a hedge fund may be in line for huge losses caused by the position it has taken on oil prices, similar to the massive natural gas gamble that hit the multi-billion dollar Amaranth fund last year.

The price drop may also have been caused by funds switching into other assets.

Slow Recovery
Martin King, analyst at First Energy Capital, said that crude stocks may soon drift lower and that the beginning of February would bring greater clarity regarding Opec's intentions for its next round of production cuts.

While the price is far off July's peak, analysts say it is too early to say whether oil will keep falling further. "Its definitely not the end of the bull market," said Kevin Norrish, an analyst at Barclays Capital.