Oil prices dropped below $88 a barrel on Monday on forecasts that warm weather in the United States would slash demand for heating fuels, adding to a weak outlook for the nation's energy use amid an economic slowdown.
Prices had been in positive territory earlier in the day after news that fog on the Houston Ship Channel was slowing shipping, potentially straining US crude stockpiles that have already dropped to their lowest in more than two years.
US crude futures settled down 42 cents to $87.86 a barrel, while London Brent crude fell 43 cents to $88.21 a barrel. "For today's trading at least, fears of energy demand contraction have taken dominance," said Mike Fitzpatrick, vice president at MF Global. "But that may be reversed just as quickly tomorrow."
US heating demand will be about 13 percent below normal this week as temperatures rise above average in the key heating regions, the National Weather Service forecast in a weekly report on Monday.
US oil prices had already been in a tailspin since hitting a peak $99.29 on November 21 amid signs of a weakening US economy that energy traders are concerned could sharply cut into demand for fuel. Leading US investment bank Morgan Stanley said in a research note Monday the US economy is likely headed to a recession, pulled down by ongoing tightening in credit markets that is curbing business spending.
The US Federal Reserve will meet on Tuesday and is widely expected to cut interest rates by a quarter point after better-than-expected US employment data on Friday reduced the likelihood of an aggressive 50 basis-point reduction.
The fall in oil prices was tempered after the US Coast Guard said dense fog had delayed 54 ships from entering the Houston Ship Channel, a 53-mile-long (85 kilometres) waterway leading to the busiest US petrochemical port. Fog in late November cut deeply into US crude imports and led to a decline in oil inventories to their lowest since March 2005.
Also stemming oil's slide, the Organisation of the Petroleum Exporting Countries last week agreed to leave its output levels unchanged, despite calls from consuming nations for more oil to meet winter demand. "Opec rolled over quotas as we expected; this was constructive, as Opec demonstrated its intent to continue to tightly manage its crude supply," Mike Wittner, oil analyst at Societe Generale, said in a research note. US Energy Secretary Sam Bodman said on Monday that he had hoped Opec would raise production at the meeting to stem falling inventory levels.
SINGAPORE: Oil slid below $88 a barrel on Monday, extending losses on expectations that a modest Federal Reserve interest rate cut would support the ailing dollar. US light, sweet crude futures fell 47 cents a barrel to $87.81 in Globex electronic trading, extending on Friday's nearly $2 drop. Prices ended some 37 cents lower on the week, but traded in a wide range of about $5. London Brent crude fell 19 cents to $88.45 a barrel.