Oil prices retreat on mild weather

The oil market pared its losses to settle above $55 Tuesday, after a volatile trading day that saw prices sink to 18-month lows on expectations for more mild weather and selling by large investment funds.

Crude prices have plummeted nearly 9 percent this year.

Drivers hoping for lower prices at the pump are starting to see gasoline prices fall as well _ but not by much. Retail gasoline prices have fallen 3.5 cents over two weeks to a national average of $2.306, according to a government report released Tuesday.

Winter in the Northeast has been warmer than normal, which has curbed demand for heating fuels in the world's largest heating oil market. As a result, market watchers expect to see larger U.S. petroleum inventories in this week's government report, due Wednesday.

Light, sweet crude for February delivery shed 45 cents to settle at $55.64 a barrel on the New York Mercantile Exchange, after plunging as low as $53.88 in earlier electronic trading. The front-month contract last fell that low in June 2005.

Traders said a break through key support levels triggered a wave of sell orders earlier in the day.

Large funds that held long positions _ those that expected prices to rise _ have been exiting the market since prices began their downward spiral, exacerbating the decline, said John Simes, president of Global Futures & Options Inc. in Heathrow, Fla.

Analysts say those investment funds also helped drive oil to record highs in 2006. The front-month contract topped $78 a barrel in July.

But when oil prices fall, it becomes more expensive for long-term investors to hold their positions. Oil contracts expire each month, and investors must pay a fee to roll over the contract. That cost becomes relatively more expensive when oil prices are declining.

Meanwhile, there has been a jump in short positions in the market, Simes said. Investors who hold short positions are betting the price of oil will drop.

The front-month crude contract has fallen 8.9 percent so far this year. The contract ended 2006 at $61.05.

Although gasoline prices have retreated slightly in recent weeks, volatility in the crude oil market has kept gasoline prices from falling faster, said Charlie Drevna of the National Petroleum Refiners Association in Washington.

"Once there is a stabilization and reduction in the price of crude, then prices should fall at the pump," said Drevna. "Because crude falls on day one, it doesn't mean that on day two the consumer will see the lower price."

Gasoline futures lost less than a cent to end at $1.4696 a gallon.

On Monday, crude oil prices rose as high as $57.72 on reports that OPEC oil ministers would consider another cut in output, and worries that a dispute between Russia and Belarus could result in energy shortages in parts of Europe.

The standoff between Russia and Belarus continued Tuesday, but oil ample supplies in Germany, Poland and Ukraine were expected to keep refineries running.

If OPEC announced another production cut _ on top of the 1.2 million barrel-a-day reduction that began in November, and the 500,000 barrel-a-day cut set to begin Feb. 1 _ analysts say prices would likely rise. Still, OPEC's previous cuts haven't been able to keep crude prices above $60 a barrel for long, largely because many traders doubt that the cuts are fully enforced.

The Energy Information Administration estimated that OPEC left crude oil output unchanged in December _ still about 650,000 barrels a day short of the production cut slated to start two months ago, according to Dow Jones Newswires.

While Nigeria's oil minister Edmund Daukoru discouraged talk of any immediate action to support prices by OPEC, Qatar's oil minister told Dow Jones Newswires on Tuesday that he is "strongly" committed to implementing all OPEC output cut agreements.

The market also weighed a forecast for increases in U.S. petroleum inventories, according to a survey of analysts by Dow Jones Newswires. The Energy Department's weekly report of inventory is scheduled for release Wednesday.

Crude inventories were expected to climb an average of 820,000 barrels.

Crude stocks normally fall this time of year, but with imports rebounding from a recent slump, inventories are likely to rise, said analyst Phil Flynn of Alaron Trading Corp. in Chicago.

Petroleum product stocks are expected to increase for the fourth straight week. Distillate stocks, which include heating oil and diesel fuel, are seen rising by an average of 1.9 million barrels while gasoline stocks are projected to increase by 2.5 million barrels.

Heating oil futures fell less than a cent to settle at $1.5565 a gallon on Tuesday while natural gas rose 2.53 cents to end at $6.631 per 1,000 cubic feet.