Oil prices slid today on expectations that more mild US weather at the start of the New Year will limit heating oil demand.
US oil prices dropped 79 cents to $42.66 a barrel by early afternoon. London's International Petroleum Exchange (IPE) was shut for a bank holiday and will reopen tomorrow.
The winter has been mild so far in the US Northeast, the world's biggest heating oil market, and normal to above-normal temperatures are expected to prevail over the next few days, forecasters Meteorlogix said.
"Weather has been the Achilles' heel of this market," said John Brady of ABN AMRO in New York. "But it is winter in the Northeast, eventually we'll get another cold blast... Until we do the market's going to feel very weak."
Mild temperatures should limit the use of household heating oil, giving refiners time to boost inventory levels as the world's biggest oil consuming country enters what is usually the coldest month of the year.
A cold snap helped draw down heating oil inventories by 1 million barrels in the week to December 24th, but they are still more than 12 per cent lower than the same time a year ago due in part to strong demand for diesel fuel, US data showed.
Oil prices soared 34 per cent during 2004, boosted by a mix of unexpectedly strong demand growth, limited spare refining and production capacity and anxiety over Middle East output.
Last week in Saudi Arabia, suicide bombers tried to storm the kingdom's Interior Ministry and a security unit in the capital Riyadh on Wednesday, reviving supply worries from the region.
Iraqi stop-start oil exports through its northern pipeline to Turkey have been idle for two weeks due to sabotage attacks.
Oil is down $13 from its all-time peak of $55.67 a barrel, touched just over two months ago, as dealers factored the potential impact of higher fuel costs on global economic growth.
Fearing a counter-season winter build in inventories, OPEC producers agreed last month to trim 1 million barrels per day of excess supply from January 1st.
Over the last month prices have settled into a $40 to $45 range, but traders warn that a dip back into the $30s - last seen in July - could precipitate a broader sell-off as speculative players leap back in to follow the bearish trend.
"As far as market sentiment goes, it will be very negative if we go back into the $30s," said Brady.