By John W. Schoen Senior producer
updated 2/7/2007 10:59:55 AM ET 2007-02-07T15:59:55

Even as Mother Nature has whipsawed energy markets with temperature extremes this winter, the recent cold snap appears unlikely to bring another surge in oil prices, according to market watchers.

Though the cold weather is stoking demand for both refined products and natural gas, warm weather in the first half of the winter left the energy pipeline well-stocked for the remainder of the winter season, after which oil demand typically eases up. 

“If you look at all of our heating fuels - distillate inventories, heating oil inventories, natural gas inventories - they're all above normal for this time of year,” said Addison Armstrong, an analyst at TFS Energy. "We've only got six more weeks (of winter), and people are already trading (futures) contracts for April. So it's kind of over already.”

In its latest weekly report, the Energy Dept. said that inventories of crude oil and refined products fell, bumping oil futures prices up a bit to just below $60 a barrel. Crude oil stocks fell by 400,000 barrels; heating oil dropped by 1.9 million barrels; distillates, which include heating oil and diesel fuel, fell by 3.7 million barrels; gasoline stockpiles rose by 2.6 million barrels. Though the drawdown in crude left inventories a bit lower than expected, they are still well above the five-year average for this time of year.

The reason for this week's drop in inventories was simple. After a balmier-than-normal December, colder-than-normal temperatures have blanketed the Northeast and Midwest this week and were expected linger through next week, according to weather forecasters. On Monday, the thermometer fell to the single-digits and teens from Maryland to Maine; many Midwest states were hit with record-low, below-zero temperatures.

“We have gone from really spectacularly warm this winter to being spectacularly cold,” said John Kilduff, an analyst with FIMAT USA. “We're looking heating demand 20 percent greater last week and looking to be 20 percent greater this week and weeks ahead. So all of a sudden the dynamic has changed in terms the demand side of the ledger for winter fuels.”

Natural gas suppliers also have been burning through inventories faster as temperatures have plunged. On top of stronger demand as a heating fuel, natural gas demand has surged as the cold weather brought a spike in demand for electric power. Many utilities use natural gas to fire up plants to meet peak demand loads.

The grid that serves mid-Atlantic States and parts of the Midwest said Monday it set a record for winter power consumption. The so-called PJM Interconnection, which sends power to 51 million people in 13 states and Washington, D.C., said demand hit close to 120,000 megawatts. The record for summer demand, 145,000 megawatts, was hit during last summer’s heat wave.

But cold weather isn’t the only force driving the price of energy. OPEC recently targeted cuts in crude production to pare down the excess supply. The oil producing nations are hoping to trim inventories that have been rising over the past month from levels that were already well above five-year averages.

Some traders are waiting to see how well OPEC adheres to those promised cuts before bidding prices higher. On Tuesday, the Energy Dept. said OPEC had only cut production by 600,000  barrels a day late last year – about half of its target. The report projected that OPEC’s latest cuts, that were set to kick in Feb. 1, would only remove about 300,000 barrels a day – or about 60 percent of the announced targets. (Total OPEC production, including its newest member, Angola, stood at about 30 million barrels a day last month, according to Energy Dept. figures.)

So while the market price of oil has recently bounced off mid-January lows of about $50 a barrel, rallies above $60 have fizzled. With the bullish speculation that drove prices toward $80 last year largely over, oil prices are more responsive to longer-term trends in supply and demand, traders say.

Those trends have been helping to put a cap on prices. For the first time in years, OPEC producers have surplus capacity they can tap; the Energy Dept pegs that surplus at roughly 2.5 million barrels a day, most of which is in Saudi Arabia. Heavy investment in non-OPEC production is beginning to pay off; some 1 million barrels a day in new capacity is expected to come on line this year from new oil drilling the Caspian Sea, Russia, Africa and Brazil, according to the Energy Dept. And U.S. oil production, which fell to 3.8 million barrels a day after back-to-back hurricanes in Sept. 2005, has crept back close to pre-storm levels of 5.5 million barrels a day.

Demand for crude, meanwhile, has been contained by a cooling economy in both the U.S. and around the world. All of which could mean a further easing in crude prices, said Gregory Miller, chief economist at SunTrust Bank.

“The domestic economy is still in slowdown mode,” he said. “And to the extent the U.S. is still a dominant purchaser and a dominant player in setting the global prices, it’s less likely that we’ll blow back through that $60 level unless demand comes back real strong."

Miller says that – assuming global growth remains sluggish and supplies remain strong – crude could ease back to the $45 to $55 range.

But lower prices couild help bring with them a pickup in demand. U.S. consumption of petroleum products fell by 0.9 percent last year compared to 2005. But the Energy Dept. is forecasting a 1.4 percent rise in consumption this year and a 1.5 percent increase in 2008.

(The Associated Press contributed to this report.)


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