Oil: Prices drop 6.5 per cent on expected warmer US weather

NEW YORK - Oil prices dropped nearly 6.5 per cent in thin holiday trade on Monday as forecasts of a return to mild winter weather in the US Northeast eased worries about heating oil supplies.

US light crude futures on the New York Mercantile Exchange fell US$2.86, or 6.47 per cent, to US$41.32 a barrel, after sinking as low as US$41.20. The losses were led by heating oil futures, which fell 8.7 per cent to US$121.08 a gallon.

London's International Petroleum Exchange was closed on Monday and will be closed Tuesday for the holidays, which kept volumes thin.

Despite falling by more than US$5 over the past five sessions, oil prices are still up about 30 per cent from the start of the year, bolstered by robust demand and refinery and production bottlenecks.

Production outages in the United States, Norway and Nigeria have halted some 500,000 barrels per day (bpd) of output, but the short-term focus is on the weather in the United States, where expectations of a return to mild temperatures has dulled heating oil demand.

Forecasts showed much of the heating load later in the week would be reduced.

Private forecaster Meteorlogix said this week's weather in the heavy consuming US Northeast would slip below normal on Monday and Tuesday but rise above normal for Wednesday through Friday. AccuWeather showed northeast temperatures gradually rising to a high of 54 degrees Fahrenheit (12 C) by Saturday.

The National Weather Service on Monday forecast heating needs in New England this week to be more than 8 per cent below normal, and 18 per cent below normal in the nation as a whole.

"With the revised milder temperatures and the stats we had last week, I'm more inclined to think we'll push lower and test the US$40.00 to US$40.25 range," said John Brady with ABN AMRO in New York. "The market definitely feels to be on the defensive."

Prices tumbled 3 per cent last Wednesday after weekly US government data showed that stockpiles of distillates -- which include winter fuel heating oil and diesel -- had risen, despite a cold snap that should have spurred demand.

In Asia, one of the world's worst earthquakes in a century unleashed a massive tsunami killing thousands across South and Southeast Asia, but it did not disrupt oil exports from the region's only Opec member, Indonesia, officials said.

Economists said they expected the disaster's economic consequences to be far less severe than the human toll.

In Iraq, saboteurs blew up a domestic pipeline linking the northern Kirkuk oilfields to a refinery in Baiji in a continuation of the kind of attacks that have repeatedly hindered exports.

- REUTERS