Traders work the crude oil options pit at the New York Mercantile Exchange Wednesday, Jan. 6, 2010 in New York, according to The Associated Press. One of the worst winter blasts in years could not obscure the enormous amount of crude and gasoline the U.S. has in storage and most energy prices began to give way Wednesday.
Oil prices fell below $83 a barrel Thursday as the dollar strengthened and investors worried a 20 percent rally in the last few weeks isn’t justified amid sluggish U.S. crude demand.
By early afternoon in Europe, benchmark crude for February delivery was down 56 cents to $82.62 a barrel in electronic trading on the New York Mercantile Exchange. On Wednesday, the contract rose $1.41 to settle at $83.18, a 15-month high.
Investors have brushed off signs of weak U.S. oil demand while bidding up crude prices from $69 a barrel in mid-December. The Energy Department’s Energy Information Administration said Wednesday that crude supplies rose last week.
“Above the $83 level, we would be viewing this price advance as falling within the ‘bubble’ category, a scenario that could play out in a much sharper than expected price plunge,” Galena Illinois-based Ritterbusch and Associates said in a report.
Analysts have also attributed the rally in part to technical buying and the growing presence of investment funds in the market, instead of the basics of supply and demand.
“The way (the Nymex contract) was massaged in front of $82 a barrel clearly shows that the current flows are not necessarily those of fundamental traders,” said Olivier Jakob of Petromatrix in Switzerland. “We still do not believe in the sustainability of (Nymex) at $85 a barrel.”
Cold weather in parts of the U.S., Europe and Asia have helped support the recent jump in oil prices, as traders expect supplies of crude products such as heating oil to run low.
“With a colder-than-usual winter in most parts of the Northern Hemisphere, oil prices remain buoyant and well supported,” Barclays Capital said in a report. “The cold snap that has engulfed the U.S. has led to a plunge in heating oil inventories.”
Others were more bearish, noting that U.S. distillate stockpiles, which include heating oil, were at their highest level at the start of the year since 1985 and that the United States recently became a net exporter of such products.
“This means that the U.S. refining system does not even have to necessarily increase refinery runs to meet the incremental demand for distillates,” Petromatrix’s Jakob noted. “All it needs to do is redirect some of the distillates flows that were exported to floating stocks back into the internal market.”
“The cold weather is not going the squeeze the system,” Jakob concluded.
Oil prices were also under pressure from gains made by the dollar on other currencies, making crude more expensive for non-dollar investors.
The euro was down to $1.4346 on Thursday from $1.4415 late Wednesday in New York, while the British pound slid to $1.5911 from $1.5997 and the dollar climbed to 92.89 Japanese yen from 92.40 yen.
In other Nymex trading in February contracts, heating oil fell 1.04 cents to $2.1928 a gallon and gasoline dropped 0.68 cent to $2.1298 a gallon. Natural gas futures fell 1.9 cents to $5.99 per 1,000 cubic feet.
In London, Brent crude for February delivery fell 52 cents to $81.37 a barrel on the ICE Futures exchange.