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Market forces bring down oil prices

Jeff Tyler Jan 4, 2007

KAI RYSSDAL: It isn’t just retail sales that have been falling.

There’s no real reason for you to have known this, but the price of a barrel of oil has fallen off the table this week. It dropped 4.5 percent yesterday. Almost 5 percent today. Since Tuesday crude’s off about six bucks in all, $55.59 cents at the close in New York.

There is a little supply and demand in the cost equation. A goverment report out today showed U.S. petroleum inventories are fatter than expected. So traders got cold feet. Also to blame, though: rising mercury. Marketplace’s Jeff Tyler explains.

JEFF TYLER: Want to know what’s up — or rather, down — with oil? Just turn on the Weather Channel.

FORECASTER 1: Now let’s check out the forecast.

FORECASTER 2: Shockingly warm weather is what we’re experiencing in the Lower 48.

What’s that mean for falling oil prices? Tom Wallin is president of the industry research firm Energy Intelligence.

TOM WALLIN: The very short answer to that question is weather. And warm weather means less oil demand for heating. We’re seeing that show up in the oil price right now.

Another factor in oil’s decline: itchy investors. Energy economist Philip Verleger says oil is no longer in vogue on Wall Street.

PHILIP VERLEGER: For the last two years, investors have been pushing cash into energy, encouraged by investment bankers, saying that energy futures are an asset class like bonds and stocks. Returns have been poor, and I think they’re leaving.

Nonetheless, he doesn’t expect the free-fall in oil prices to last. Verleger’s been watching the Weather Channel too. Late January is supposed to be cold on the East Coast. And if demand goes up, so do prices.

VERLEGER: I expect to see a very volatile year.

OPEC is the other wild card. Both Verleger and Wallin agree that the cartel is committed to keeping the price of oil above 55 bucks a barrel.

If it falls below that threshold, OPEC is expected to cut production in order to boost prices. And, if the economy picks up in the U.S., strong demand for energy could lead us back to where we were last year — when limited refinery capacity led to higher prices at the pumps.

In Los Angeles, I’m Jeff Tyler for Marketplace.

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