Oil Falls to 3-Month Low on Mild Weather

Tue Dec 7, 2004 12:29 PM ET

LONDON (Reuters) - Oil prices fell more than a dollar to a three-month low on Tuesday as mild winter weather sapped demand in the heavy energy consuming U.S. northeast.

U.S. light crude were down $1.33 at $41.65, the first time they have broken below $42 since August 31.

London Brent crude (LCOc1: Quote, Profile, Research) fell $1.20 to $38.45 a barrel.

Weather forecasts in New York for the next week are for above-normal temperatures for the time of year, easing market concern about heating oil stocks meeting cold weather demand.

"There seems to be plenty of oil around, both crude and products, demand is drifting and we're expecting U.S. stocks to grow on Wednesday," said one London-based dealer.

So far mild winter weather in the U.S. Northeast has helped negate worries over a year-on-year deficit in winter fuel stocks, with October and November global oil demand down 492,000 bpd due to warm weather, Goldman Sachs said.

Traders will look at Wednesday's U.S. inventory data for more evidence of rebuilding heating fuel stockpiles.

Distillate supplies, which include heating oil and diesel, are expected to have risen 1.4 million barrels in the week ended Dec 3, the third rise in a row, as mild winter weather and rising refinery runs top up supplies.

The market has refocused attention on OPEC for the first time in half a year, during which the cartel's biggest production spree in 25 years seemed to do little to rein in soaring prices.

Ministers from the Organization of the Petroleum Exporting Countries will meet on Friday in Cairo to review supply/demand fundamentals and production policy.

FAIR PRICES

Ministers are also expected to give clues as to what the group sees as a fair price for its basket of crude oils. The OPEC basket price stood at $34.53 a barrel on Monday, and has been above the target range of $22-$28 a barrel for a year.

While OPEC is not expected to formally change the target range, the weakness of the dollar has led members to revise higher their ideas of a fair price, with many pushing for around $30 a barrel.

The steep fall in prices from the late-October record high of $55.67 a barrel has spurred some OPEC members to urge a clamp down on output in excess of formal limits, estimated by a Reuters survey at about 1.1 million bpd in November.

"All options are open at the upcoming OPEC ministerial meeting and it may be appropriate to comply with output quotas in the first stage...and if prices continue to decline then we would discuss cutting the output ceiling," Energy Minister Mohammed al-Hamili told reporters on Tuesday.

The UAE minister also said he expected a glut in inventories in 2005 if OPEC continued to produce at current levels.

"The question facing the oil markets... is not whether OPEC will cut production but by much and when," Barclays Capital said in a report on Tuesday. If OPEC does not change output levels, stocks could be rising by nearly three million barrels per day in the second quarter next year, the report said.

Prices found some support on Monday after violence in top exporter Saudi Arabia and lingering production outages worldwide.

An attack by militants on the U.S. consulate in Jeddah on Monday claimed by al Qaeda spurred concerns about the security of supplies from the world's biggest producer. The attack left at least nine people dead.

Elsewhere, around 120,00O barrels per day of Nigerian oil production is shut in as villagers there protest over jobs. In the Norwegian North Sea, 205,000 bpd of output is shut in during repairs to an oil platform.