Warm Winter Pushing Oil Prices Down

Speculative bets helped push up the price of oil to more than $77 a barrel last year. But the price of crude has fallen sharply in the first two weeks of the year, in part due to unusually warm winter weather.

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RENÉE MONTAGNE, host:

Oil traders go back to work today after a long holiday weekend. The price of crude oil has fallen sharply in the last two weeks of the year. Unusually warm weather in parts of the country - or the first two weeks of the year, rather. Unusually warm weather in parts of the country has given energy speculators cold feet.

NPR's Scott Horsley reports.

SCOTT HORSLEY: Oil prices begin this week more than 13 percent lower than they were just two weeks ago. And the price of oil has tumbled more than 30 percent from its peak last July. Senior analyst Fadel Gheit of Oppenheimer and Company says it hasn't suddenly gotten cheaper to pump oil out of the ground. Instead, the discount is coming from the trading pits and electronic exchanges where oil is bought and sold.

Mr. FADEL GHEIT (Senior Analyst, Oppenheimer and Company): The minute the oil leaves the ground, it's owned by the financial markets. So every oil shipment around the world is traded several times before it reaches their destination.

HORSLEY: And in the last two weeks, many of the people making those trades - on behalf of hedge funds, investment banks, and ordinary pension funds - have lost their appetite for oil. Some analysts blamed an unusual warm spell in the northeast, which depressed demand for heating oil. But Gheit says that was merely the straw that broke the camel's back. Speculators who'd previously seized on any excuse to pump money into oil futures were now racing to take money out.

Mr. GHEIT: You know, only six months ago, any news was taken as foolish news for oil prices. Now any news is taken as (unintelligible) news for oil prices. There was a stalemate that when Belarus and Russia, and Hugo Chavez is nationalizing and making all this kind of inflammatory statements - nobody cares.

HORSLEY: In fact, the day after Chavez - the president of oil-rich Venezuela -pledged to step up nationalization in his country, oil prices continued to fall. But energy analyst Ted Harper of Frost National Bank in Houston, says with cooler weather and cooler heads, the sell off in oil may be coming to an end.

Mr. TED HARPER (Energy Analyst, Frost National Bank): As with any market, once you start to build momentum in a certain direction, it takes a while for fundamentals to wheel out, as it were. But I think we are getting to a point where those with a little longer-term horizon have started to nose around some of the fallen stars.

HORSLEY: Chief economist Nariman Behravesh of Global Insight also suspects the stampede out of the oil market has pretty much run its course.

Dr. NARIMAN BEHRAVESH (Chief Economist, Global Insight): Our view is that most of the speculative activity is done with, and that we actually might see a slight rebound as the fundamentals come back into play, as it were. So we wouldn't be surprised to see a little bit of a bounce back. Not a lot, but a little bit.

HORSLEY: So far, the drop in oil prices has been slow to show up at the gas pump. While oil prices fell about 19 cents a gallon in the last two weeks, gas prices dipped just over a nickel. Gas prices are well below their midsummer peak, however, and Behravesh says that has given consumers a little extra money to spend elsewhere.

Dr. BEHRAVESH: People who had squeezed on discretionary spending will now spend a little bit more, whether it's going out to restaurants or taking that vacation that they didn't take last summer. So we will see a little bit more discretionary spending that wasn't there last summer in particular.

HORSLEY: Still, both gasoline and oil prices have proven wildly unpredictable in the last few years. Weather and geopolitics can change quickly. And as the last two weeks have demonstrated, so can the mood of speculators in the oil market.

Scott Horsley, NPR News.

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