- The Washington Times - Wednesday, December 8, 2004

A dramatic fall in oil prices in the last month has prompted the government to scale back estimates of home-heating costs this winter.

Households that heat with natural gas, including most residents of the Washington area, will see their bills rise by 9 percent, rather than 15 percent, this heating season from October to March, according to the Energy Information Administration.

Local residents who burn heating oil will still see a hefty increase of 34 percent — as opposed to 37 percent — to $1,279 for the season, the agency said. Heating oil has been in especially short supply this season, although inventories have been building because of milder-than-normal weather.

Average heating bills for gas users, instead of vaulting over $1,000 for the first time as predicted last month, are likely to rise just short of that mark, according to the revised estimates.

The new outlook was prompted by a drop in premium crude prices of more than 25 percent in New York trading since hitting a record high of $55.67 a barrel in late October. Prices continued their steep descent yesterday, with premium crude tumbling 3.5 percent to $41.46.

The agency is assuming that oil prices will average around $49 during the fourth quarter — an assumption that may be too conservative if oil prices continue to drop, analysts say.

“Oil prices could continue to fall through the end of the year if the global supply chain avoids a significant dislocation,” said Tom Sommers of Cambridge Energy Research Associates.

He attributed the steep drop in energy prices in recent weeks to a combination of events that have caused production to outstrip demand for oil by about 400,000 barrels a day.

Unseasonably warm weather in the United States has enabled utilities to rebuild their depleted inventories of fuel, while production of oil and gas in the Gulf of Mexico is ramping back up after being devastated by Hurricane Ivan in September.

The shortfall of Gulf production has shrunk from 500,000 barrels a day in early October to less than 200,000 barrels a day at the end of November, the energy agency said.

Meanwhile, members of the Organization of the Petroleum Exporting Countries have been pumping oil at full tilt since prices spiraled into record territory this summer, adding to a mounting fuel glut.

Terrorist activity in Iraq, where dozens of pipelines and facilities have been sabotaged, abated somewhat this fall, easing pressure on prices and prompting many speculators who had been betting on oil prices going higher to exit the market.

Growth in consumption of oil also has slowed in both the United States and China, the world’s two biggest oil users, in reaction to the run-up in oil prices this summer. The energy agency expects that softer growth in demand to continue next year.

With the world increasingly swimming in oil it cannot use, OPEC members are now talking about the possibility of a production cut for the first time in a year at a meeting scheduled for Friday in Cairo.

Analysts expect OPEC to try to stabilize prices at around $40 for premium crude, which corresponds to roughly $30 for OPEC’s benchmark crude, in part to compensate for the rapid fall of the dollar in the last month.

But Mr. Sommers cautioned against uncorking the champagne and celebrating the break in oil prices too soon, with the most severe months of winter still ahead.

“Many upside-risk factors are still in play,” he said, including the possibility that weather could turn much colder as it usually does this time of year.

The National Weather Service is forecasting lower-than-normal temperatures in most of the eastern half of the nation from Dec. 12 through Dec. 16.

Threats of disruption remain, as insurgents continue their activities in Iraq, protests simmer in Nigeria, and the struggle over control of the oil sector continues in Russia. A combination of those could drive prices back over $50, he said.

One sign that the downtrend in oil prices may have staying power is the minimal impact on the market of a terrorist strike at a U.S. consulate in Saudi Arabia on Monday, analysts said.

Only a month ago, such an attack might have catapulted prices significantly higher, but on Monday it served only to temporarily brake oil price’s rapid fall.

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