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 US 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.
US 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. ICE Brent crude, which was trading on Friday when the US 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 'twin-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 travellers take to the roads and air to return from weather-extended holidays.
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. "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. Oil prices have climbed 27 percent since late August, driven by the combination of a weakened US dollar and unusually cold weather in Europe and the United States that has boosted heating fuel demand and eroded inventories.
A persistent shortage of gasoline in the New York harbour 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.
US 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.