The price of crude fell 2.5% this morning to $38.14 a barrel while the price of heating oil gained two-tenths of a percent as of 9:51 am eastern time on the last day of the 2008 calendar year.  Investors looking back at the last year on the oil market had reason for pessimism, as the price of crude lost 60% following its all-time high of $147 a barrel in early July.  A struggling world economy and receding demand levels in the U.S., Japan and Europe continued to heavily influence the market.

The U.S. Energy Information Administration’s weekly data are due out in the next hour, and most analysts are predicting a drop in crude stockpiles in contrast to increases in gasoline and distillate stockpiles.

HEAT USA price experts announced a small increase in retail prices today, despite yesterday’s decreases in crude and heating oil prices on the commodities market.  They speculated that the price increase could stem from increased heating oil demand as a result of a new spate of cold weather settling into the Northeast.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: UP $0.01
Morning projection (for Thursday-Friday’s average price per gallon): UP $0.02

With yesterday’s OPEC production cuts already a distant memory, the market price of crude and heating oil dropped far and fast in late trading today.  Crude oil lost nearly 10% to close at $36.22 a barrel, and heating oil fell by almost 4%.

All-around gloomy economic news precipitated the drops, directly and indirectly indicating that oil demand continued to slow this week and will not rebound any time soon.  The EIA’s short-term energy outlook released yesterday included rising domestic crude supplies and a 4.9% drop in overall U.S. demand over the last four weeks.  China’s plan to cut gasoline and diesel prices apparently had no effect on prices, but could lift future prices if it is successful in stimulating demand.

HEAT USA price experts were happy to report a larger-than-expected decrease in retail heating oil prices for tomorrow.

HEAT USA Price Report
Evening projection (for Friday’s average retail heating oil price per gallon): DOWN $0.04

Oil prices plunged today, moving in the opposite direction intended by OPEC when it announced a new production cut of 2.2 barrels per day, effective January 1st.  Although the cut was the largest ever implemented by the cartel, and slightly deeper than the 2 million bpd cut analysts expected, the market at large viewed the cut as not substantial enough to compensate for serious reductions in demand that have been seen in recent months.  From CNBC.com:

“It seems like, despite the fact that the economies of producer nations are clearly in trouble, they don’t have the temerity to actually go ahead and do the kind of cut that would be really interesting to traders to turn this around,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut.

At the 2:30 pm NYMEX close, crude oil had lost 8% to settle at $40.06 a barrel and heating oil had lost about 1%.

New stockpile data released today by the EIA showed increases in crude and refined oil products as a result of continually-falling demand also contributed to falling oil prices.

HEAT USA price experts were pleasantly surprised by the drop in oil prices, and predicted a slight reduction in retail prices tomorrow.

HEAT USA Price Report
Evening projection (for Thursday’s average retail heating oil price per gallon): DOWN $0.015 to $0.02

Crude and heating oil prices fluctuated this morning and were near their opening prices as of 10:03 am eastern time; crude oil had risen half a percent to $43.62 a barrel, and heating oil had gained almost three percent.

Saudi Arabia’s oil minister Ali Naimi set expectations on Wednesday of a 2 million barrel per day production cut to be agreed upon at the OPEC meeting today.  While that would be the largest single production cut in the cartel’s history, many analysts see it as inadequate to push up oil prices.  From Bloomberg.com:

“I think 1.5 million to 2 million is needed just to stabilize the market,” said Robert Montefusco, a broker at Sucden (U.K.) Ltd. in London. “Demand is falling away quite rapidly. They will probably need more if they want prices going back up to $50 and higher.”

The oil market is also waiting for the announcement of the EIA’s weekly oil inventory data.  Predictions of the stockpile data vary, but most include an increase in crude supplies, which would help drive down oil’s market price.

HEAT USA price experts confirmed a one penny increase over yesterday’s retail prices this morning, and stated that results of the OPEC meeting and official EIA stockpile data were needed to project tomorrow’s prices.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: UP $0.01
Morning projection (for Thursday’s average retail price per gallon): TBD

Two pieces of good news sparked a bullish trend in crude and heating oil prices this morning, lifting crude by 7% and heating oil by 5%. Crude surpassed the $45 per barrel mark and rested at $46.60 at 9:55 am eastern time. The International Energy Agency predicted that world oil demand would grow again in 2009, contrasting with yesterday’s forecast by the U.S. Energy Information Administration, which had estimated a decrease of 450,000 barrels per day next year.

Oil prices were also buoyed by oil minister Ali al-Naimi’s announcement of Saudi Arabia’s output numbers for November: 8,493,300 barrels per day. The figure was in line with reduced production goals set in October by OPEC, and was significantly lower than the 9.05 million barrels per day estimated by the IEA. Prices were further supported by persistent expectations of another OPEC production cut to come out of the group’s meeting next week, as well as Russia’s announced plans to match OPEC cuts.

HEAT USA price experts confirmed a slight price decrease this morning coming after yesterday’s midday price hike, and predicted a moderate-to-large increase in tomorrow’s prices to come as a result of today’s news of production cuts and expectations of growing demand next year.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: DOWN $0.02
Morning projection (for Friday’s average price per gallon): UP $0.05

In one of the most volatile trading days for oil commodities in recent months, this morning’s inventory data released by the EIA predicted the final performances of crude and heating oil. Crude oil stocks in the U.S. rose less than expected while stockpiles of gasoline and distillates, which include heating oil, increased substantially, defying predictions of slight decreases. The data, coupled with fresh announcements that Saudi Arabia has begun to reduce oil production and exports, drove up crude oil by over 3% to $43.52 a barrel. Heating oil, weighed down by the surprise inventory increases, fell by about 2%.

HEAT USA price experts announced that the midday price increases announced this afternoon had been cut in half by late-day market losses by heating oil on NYMEX, to be reflected in tomorrow’s retail prices.

HEAT USA Price Report
Evening projection (for Thursday’s average retail heating oil price per gallon): DOWN $0.02

Crude and heating oil prices both fell 2.5% from their morning increases in reaction to U.S. inventory data released by the EIA at 10:35 am eastern time.  Although the increase in crude oil stocks was smaller than expected (0.4 million barrels vs. predictions of a 1.1 million barrel increase), gasoline and distillate stocks rose by several million barrels following predictions of stock decreases.

The effects of the data were immediately apparent on the oil markets, but could be counteracted in the last four hours of trading.

Crude and heating oil prices jumped up this morning, effectively erasing yesterday’s price drops. As of 10:03 am eastern time, crude was up 5% to $44.16 a barrel and heating oil was 3% above its Monday closing price. A Bloomberg article cited near-certain production cuts to come out of OPEC’s December 17th meeting and Russia’s plans to make a coordinated production cut as the main reasons for today’s optimism on the oil market. Industry analysts surveyed by Bloomberg expect a 1.3 million barrel increase in crude stocks to be announced by the EIA this morning, but also predicted a significant decrease in gasoline and distillate stocks.

CNBC.com reported that U.S. gasoline demand in November increased 0.3% over November 2007 levels, leading Petromatrix analyst Olivier Jakob to comment, “We can’t really talk about ‘demand destruction’ in the U.S. anymore.”

Good news appeared to outweigh bad this morning, as expectations of increasing crude stocks in the U.S. and falling crude imports in China failed to drag down prices.

HEAT USA price experts confirmed an expected moderate drop in retail heating oil prices for today, but predicted a similar margin of increase in tomorrow’s prices.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: DOWN $0.05
Morning projection (for Thursday’s average price per gallon): UP $0.06

The Energy Information Administration released new data today, reducing predictions for global oil demand by 50,000 barrels per day in 2008 and 450,000 barrels per day in 2009.  The EIA also forecast lower gross domestic product growth for 2008 and 2009.

The negative economic news of the day appeared to dominated the markets, dragging down stock markets as well as crude and heating oil.  The price for a barrel of crude dropped by about 4% to settle at $42.44.  The price for a gallon of heating oil fell by 3.5%.

HEAT USA price experts were pleased to reverse their prediction of a slight price increase in tomorrow’s retail heating oil price, instead forecasting  a moderate price decrease.

HEAT USA Price Report
Evening projection (for Wednesday’s average retail heating oil price per gallon): DOWN $0.05

The oil market got an unexpected boost this morning when the EIA announced decreases in crude, gasoline, and distillate stockpiles in the U.S.  Analysts had predicted stockpile increases in all three categories.  The good news did briefly drive up crude and heating oil prices on NYMEX, but optimism was short-lived.  The stockpile numbers were quickly overshadowed by the results of a survey by a private company that showed corporate layoffs hit near a seven-year high in November.

The two news stories appeared to counterbalance each other, as crude and heating oil prices closed just a fraction of a per cent off of their opening prices.

HEAT USA price experts revised earlier predictions to show no change in average heating oil prices from today to tomorrow.

HEAT USA Price Report
Evening projection (for Thursday’s average retail heating oil price per gallon): NO CHANGE

EIA data on stockpiles of crude oil, distillates, and gasoline for the week ending November 28th showed decreases in all three categories.  Most analysts had expected large increases in the stockpile numbers by hundreds of thousands, if not millions of barrels.  Marketwatch.com reported that crude oil stocks had decreased by 400,000 barrels, gasoline stocks had fallen by 1.6 million barrels, and distillate stocks dropped by 1.7 million barrels.

Crude oil and heating oil market prices will most likely make large jumps in response to the news.  HEAT USA price experts adjusted their projections for Thursday’s prices accordingly.

HEAT USA Price Report UPDATE
Morning projection (for Thursday’s average price per gallon): UP $0.05

Crude and heating oil prices are showing small ups and downs this morning, but both were just fractions of a percentage point away from their Tuesday closing prices as of 9:29 am eastern time.  The Department of Energy’s information arm, the Energy Information Administration, will release weekly data on U.S. stockpiles of petroleum products at 10:35 am eastern time, with most analysts expecting moderate increases in stockpile numbers for crude oil, gasoline, and distillates, which include heating oil.

According to CNBC.com, a Reuters survey predicted increases of 1.7 million barrels of crude oil, 300,000 barrels of distillates, and 900,000 barrels of gasoline.  Stockpile increases by larger-than-predicted margins could drive prices lower today, while smaller-than-expected increases or overall decreases could drive prices higher.

HEAT USA price experts announced a slightly larger reduction in retail heating oil prices than was projected yesterday evening, and predicted minimal price changes for tomorrow, barring inventory numbers vastly off predicted levels.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: DOWN $0.02 to $0.04
Morning projection (for Thursday’s average price per gallon): UP $0.01

After posting a short-lived recovery this morning, crude and heating oil prices both dropped today, losing 4% and 1%, respectively.  Crude closed at $46.96 a barrel, the lowest closing mark since May 20, 2005.  Steadily-worsening economic conditions around the world continued to be the main cause of falling oil prices, as summarized by Marketwatch.com: “‘Markets are increasingly concerned that the worldwide economic decline is too pronounced to be fixed any time soon and a worldwide recession will curtail energy demand,’ said analysts at Action Economics.”

Perception that OPEC nations are not reducing production to agreed-upon levels and anticipation of EIA data on U.S. oil stockpiles to be announced tomorrow also put a drag on NYMEX oil prices today.
HEAT USA price experts were pleased to see a turnaround in the price of heating oil on the markets today, and expect a small reduction in retail prices tomorrow.

HEAT USA Price Report
Evening projection (for Wednesday’s average heating oil price per gallon): DOWN $0.02

On October 8th of this year, the Energy Information Administration (EIA) released its short-term energy outlook, warning of substantially higher heating and energy costs this winter. That same day, HEAT This Week applauded the EIA’s cautious estimates, but questioned their accuracy. In the October 8th newsletter, (“What to Expect this Winter,” read the entire article on The Heat Zone blog) HEAT USA president Andrew Heaney explained that the EIA’s report ignored important economic evidence that crude oil and other energy prices would continue to decline sharply for several months, at least.

It looks like the EIA has come around to HEAT USA’s point of view. On November 12th, the agency released its November Short Term Energy Outlook, which essentially reversed the position set out in the October report. The EIA summarized its new position in the report’s top bullet point:

The current U.S. and global economic downturn has led to a decrease in global energy demand and a rapid and substantial reduction in crude oil and other energy prices. As a result, projections for both energy demand and prices are considerably lower than last month’s Outlook.

The new report offers good news for consumers of all petroleum products: heating oil, gasoline, propane, and natural gas users will all pay less for their fuels this winter than they did in 2007. As for heating oil, an Associated Press article specified that heating oil users are expected to pay $1,694 for oil this season, a 13 per cent decline from last winter, and almost $700 less than the EIA’s October prediction. The report forecasts the average heating oil price per gallon this winter will be $2.75, a 56-cent reduction from last month’s report and 17 per cent lower than last winter’s average price. In addition to plummeting worldwide energy demand, consistent increases in crude and heating oil inventories in the US have also contributed to lower retail prices, according to a Reuters article that noted heating oil inventories had risen by 1.3 million barrels in the last week.

The news appears to be consistent throughout the Northeastern states. According to the Scranton Times-Tribune, heating oil prices in Pennsylvania have fallen 15 per cent in the last month. The Boston Herald reported the average price in Massachusetts to be $2.85, 31 cents lower than November of 2007.

Of course, because the EIA’s reports come out every month, December could bring yet another drastic change in the short-term energy outlook, but that is unlikely. Because low oil prices are primarily a product of dwindling energy demand around the world, major price increases would have to be brought about by a resurgence in energy demand. While energy demand will almost certainly return to the early 2008 levels that caused record-high oil prices, it will not happen in a matter of days or weeks, but months or years. Heating oil prices will continue to fluctuate, but consumers throughout the Northeast can look forward to lower prices than last winter for at least the next two or three months.

NOTE: This article first appeared in the November 14th, 2008 edition of the HEAT This Week email newsletter.

The Dow Jones Industrial Average rose over 500 points today, helping to pull up crude and heating oil prices, which rose 5% and 3%, respectively.  An EIA report released today showed that “demand destruction is still occurring,” said Tradition Energy analyst Gene McGillian, quoted on CNBC.com.  But a lower-than-expected increase in US crude inventories and the announcement of plans for another OPEC meeting on November 29th stimulated enough confidence to bring about an up day for crude and heating oil.

HEAT USA price experts noted another day of steep ups and downs for oil prices, and expected a small increase in retail prices tomorrow.

HEAT USA Price Report
Evening projection (for Friday’s average heating oil price per gallon): UP $0.04

After-hours trading drove the price for a barrel of crude down to $55.64, after it settled at $56.16 at the market’s close.  The price for a gallon of heating oil also dropped sharply, losing over 5% on the day and settling at $1.83.  Reduced predictions of oil consumption by the US EIA and IEA further intensified fears of a major worldwide recession.

“Fear global recession is worsening day by day is driving this market down.  Demand for oil is deteriorating week by week,” said Rob Laughlin, senior oil analyst at MF Global, quoted on CNBC.com.

HEAT USA price experts were pleased to announce a hefty drop in retail prices for tomorrow.

HEAT USA Price Report
Evening projection (for Thursday’s average retail price per gallon): DOWN $0.10

While the stock market continues to limp through its most turbulent time period in recent history, the price of crude oil has also gone through historic drops in price.  As previously stated in the Zone, the price of heating oil tends to follow the price of crude closely, so the first step in understanding recent fluctuations in the price of heating oil is understanding the latest trends in the price of crude.

Source: The Financial Times (www.ft.com)

As the chart above illustrates, the last 10 days have brought a drop of more than $20 in the price of a barrel of crude oil on NYMEX .  This huge decrease is primarily a product of the current economic crisis, which has intensified the last few months’ trend of decreasing oil demand in the US and abroad.  “The prospect of a deep global recession and the negative demand implications for oil are causing the downward trend in prices to continue,” said Christopher Bellew, a senior broker at Bache Commodities Ltd. in London, as quoted on Bloomberg.com.  Although reduced demand predictions through the end of the calendar year have been questioned by some market analysts, recent cuts in demand predictions by private firms and government organizations, including the International Energy Agency and Goldman Sachs,  give support to expectations of lower demand into early 2009.

In addition to falling demand, increased supply has also contributed to lower crude prices in recent weeks.  Wednesday’s announcement by the Energy Information Administration that crude oil stockpiles in the US are much higher than predicted (reported by Forbes.com) immediately drove prices down.  The modest supply and production interruptions caused by hurricanes Gustav and Ike have been resolved by now, allowing supply levels in the Gulf of Mexico to return to normal.

Yesterday, OPEC convened an emergency meeting and afterward signaled that it would meet again in early November, and most likely cut production at that time in an attempt to buoy slipping prices.  Quoted in a Financial Times article, oil consultant Olivier Jackob acknowledged that reduced worldwide demand is most influential force in the current market: “Be it in November or in December, be it formally or informally, Opec will need to reduce production - not because the price is currently too low but because there is not enough demand.”  The fact that OPEC’s announcement had little to no effect on falling prices yesterday and today gives further weight to demand reduction being the most important cause of oil’s decline, as the Financial Times  article confirms: “The drop suggested that the market was firmly focused on the impact of the financial crisis on global economic growth and energy demand next year, rather than on the cartel’s [OPEC's] action.”

The evidence seems to support the prediction that the downward trajectory of crude prices will continue through the rest of 2008, and perhaps into 2009.  Wherever oil prices go in the future, we can be sure of one thing: that a recovering or further-deteriorating global economy will be the deciding factor.