Oil prices continue to retreat

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NEW YORK (AP) – Oil prices retreated modestly Tuesday, paring an earlier slide to 18-month lows on expectations of more mild weather and selling by large investment funds who had helped push prices to record levels last year.

Winter in the Northeast has been warmer than normal, which has curbed demand for heating fuels in the world’s largest heating oil market. Market watchers expect to see larger U.S. petroleum inventories in this week’s government report, as a result.

Light, sweet crude for February delivery dropped 40 cents to $55.69 a barrel in afternoon trading on the New York Mercantile Exchange, after dipping as low as $53.88 in earlier electronic trading. The front-month contract last fell that low in June 2005.

February Brent crude at London’s ICE Futures exchange fell 35 cents to $55.25 a barrel.

Traders said a break through key support levels triggered a wave of sell orders.

Large funds that held long positions – those that expected prices to rise – have been exiting the market since prices began their downward spiral, exacerbating the decline, said John Simes, president of Global Futures & Options Inc. in Heathrow, Fla.

Analysts say those investment funds also helped drive oil to record highs in 2006. The front-month contract topped $78 a barrel in July.

But when oil prices fall, it becomes more expensive for long-term investors to hold their positions. Oil contracts expire each month, and investors must pay a fee to roll over the contract. That cost becomes relatively more expensive when oil prices are on the decline.

Meanwhile, there has been a jump in short positions in the market, Simes said. Investors who hold short positions are betting the price of oil will fall.

The market “is still in a liquidating mode,” he said.

The front-month crude contract has fallen 8.1 percent so far this year, based on Monday’s closing price of $56.09. The contract ended 2006 at $61.05.

Citigroup analyst Doug Leggate suggested in a client note that oil’s fall below $55 – a “key technical support level” – could signal a move even lower toward $50. He blamed the severity of the drop largely on the pullout of fund money from the market.

The market shrugged off Monday’s more bullish developments, when prices rose as high as $57.72 on reports that OPEC oil ministers would consider another cut in output, and worries that a dispute between Russia and Belarus could result in energy shortages in parts of Europe.

The halt to the flow of Russian oil through Belarus initially supported prices Monday, but ample supplies in Germany, Poland and Ukraine were expected to keep refineries running.

Nigeria’s oil minister Edmund Daukoru discouraged talk of any immediate action to support prices by OPEC, which recently resolved to cut output by 1.7 million barrels per day.

“Let’s implement the 1.7 million fully then we’ll see if there’s a need for additional cuts,” Daukoru told Dow Jones Newswires.

If OPEC announced another production cut – on top of the 1.2 million barrel-a-day reduction that began in November, and the 500,000 barrel-a-day cut set to begin Feb. 1 – analysts say prices would likely rise. Still, OPEC’s previous cuts haven’t been able to keep crude prices above $60 a barrel for long, largely because many traders doubt that the cuts are fully enforced.

Qatar’s oil minister told Dow Jones Newswires on Tuesday that he is “strongly” committed to implementing all OPEC output cut agreements.

Forecasters expect warmer-than-normal temperatures in the Northeast over the next 10 days.

Heating oil futures fell less than a cent to $1.555 a gallon on Tuesday while natural gas rose 2.5 cents to $6.63 per 1,000 cubic feet. Gasoline futures lost less than a cent to $1.4720 a gallon.

Analysts surveyed by Dow Jones Newswires expect U.S. petroleum inventories to rise in government data to be released Wednesday by the U.S. Energy Department. Crude inventories were expected to climb an average of 820,000 barrels, the survey showed.

Crude stocks normally fall this time of year, but with imports rebounding from a recent slump, inventories are likely to rise, said analyst Phil Flynn of Alaron Trading Corp. in Chicago.

Petroleum product stocks are expected to increase for the fourth straight week. Distillate stocks, which include heating oil and diesel fuel, are seen rising by an average of 1.9 million barrels while gasoline stocks are projected to increase by 2.5 million barrels.

AP-ES-01-09-07 1626EST

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