Oil dips after 26-month high, China rates weigh

By Jonathan Leff

NEW YORK (BestGrowthStock) – Oil dipped on Monday after briefly hitting its third successive 26-month high, ending a five-day rally after a Chinese rate increase threatened to slow demand and a major East Coast refinery resumed operations.

As a major blizzard in the U.S. Northeast further diminished already thin holiday trading volume and threatened to stoke oil demand for home heating, many traders expected the fourth-quarter rally to quickly resume toward $100 a barrel as key OPEC members showed no sign of moving to halt its rise.

U.S. crude for February fell 51 cents to settle at $91 a barrel, after hitting an intraday peak of $91.88 — the highest since October 2008. It dropped to $90.81 a barrel in after-hours trading by 3:48 a.m. EST.

ICE Brent crude, which was trading on Friday when the U.S. market was shut, rose 12 cents to $93.89 a barrel.

Prices recovered from a session low of $90.51 in a midday bounce, but traders said that was likely just a larger order on the slowest day of the year. Total crude trading volume was around 160,000 lots, about one-quarter of the norm.

“In light ‘tween-holiday’ trading volume the shift may represent little more than a small change in order flow,” said Tim Evans of Citi Futures.

The massive blizzard that snarled traffic and prompted the New York Mercantile Exchange to begin floor trading two hours later than usual was viewed a double-edged sword for oil: lifting demand for home heating, but diminishing demand for transport fuels as cars stayed parked and jets grounded.

“Travel demand is going to get hurt. Clearly you are going to see some very low gasoline demand, but the question is whether this is going to be a factor,” said Peter Beutel, president of Cameron Hanover in New Canaan, Connecticut, estimating that East Coast fuel demand could fall by a fifth.

Demand could rise once the weather clears up, however, analysts said, as travelers take to the roads and air to return from weather-extended holidays.

CHINA VS OPEC

Despite the thin conditions traders had two major Christmas factors to absorb on Monday: China’s second interest rate rise in just over two months, and an Arab oil ministers’ meeting that underscored OPEC’s resistance to pumping more crude.

Although Beijing’s quarter-point rate rise had been expected as it strives to keep its economy from overheating and temper inflation, the timing was a surprise. But most markets took the news in stride, despite the underlying fear higher rates could slow commodity demand.

When China last raised interest rates in mid-October, oil fell 4 percent, although the market soon recovered — and has gained over 9 percent since then.

“I think the Chinese rate thing is going to give us a little bit more of a correction on the downside, but it’s not going to be a big bust because you’d have seen it by now,” said Edward Meir, energy and metals analyst at MF Global.

But OPEC comments at the weekend’s OAPEC meeting in Cairo lent support as Kuwait’s oil minister said the global economy could withstand an oil price of $100 a barrel. Others in the group showed little inclination to consider raising production before the group’s next meeting in June.

Regardless of OPEC output policy, production could rise from Iraq, which is excluded from OPEC’s system of supply curbs as it recovers from war and sanctions, and from other big Gulf members who may pump more oil without a change in policy.

REFINERY RESTART VS BLIZZARD DEMAND

Oil prices have climbed 27 percent since late August, driven by the combination of a weakened U.S. dollar and unusually cold weather in Europe and the United States that has boosted heating fuel demand and eroded inventories.

Speculators have piled back into the market as fundamentals improve: Money managers extended their net long NYMEX crude oil positions to a fresh record high of 194,304 lots in the week to December 21, up a hair from the week before, data showed.

A persistent shortage of gasoline in the New York harbor area has contributed to those gains, although some tightness could be eased by the restart of the Hovensa St. Croix 150,000 barrel-per-day (bpd) gasoline making fluid catalytic cracker on December 24 after an outage of over two weeks.

U.S. gasoline futures for January fell 2.17 cents, or 0.9 percent, to $2.4209 a gallon on Monday, outpacing crude’s 0.56 percent losses.

Heating oil also fell, with traders looking beyond the short-term heating demand boost of the first severe snowstorm of the season in the Northeast — the biggest heating oil market in the world — to more benign conditions this week.

Demand for heating oil this week will average 1.2 percent below normal, after last week exceeding the norm by around 4 percent, the National Weather Service said.

(Additional reporting by Randy Fabi in Singapore and Barbara Lewis in London; Editing by Lisa Shumaker and Jim Marshall)

Oil dips after 26-month high, China rates weigh