OIL prices dropped below US$65 a barrel as investors sold contracts before their expiration yesterday, and before the US government's weekly inventory report.
News of a partial oil production shutdown in Alaska and a government report predicting a busy hurricane season failed to boost prices, The Associated Press reported.
The June contract for light, sweet crude, which expired yesterday, lost US$1.30 to settle at US$64.97 a barrel on the New York Mercantile Exchange. The July contract also fell US$1.36 cents to close at US$65.51 a barrel.
July Brent crude slipped 97 cents to US$69.52 a barrel on the ICE Futures exchange.
"This is a market really reversing course on a swing in sentiment, in anxiety over what tomorrow's inventory report might show," said energy analyst Tim Evans at Citigroup Global Markets. "It's exaggerated by thin trading conditions both in gasoline and in June crude oil futures, which expired today."
Concerns ahead of the high-demand summer driving season in the US have propped up prices lately, despite expectations that a snapshot of inventories due for release Wednesday could show the third increase in gasoline stocks in as many weeks.
The Energy Information Administration said last week that domestic gasoline inventories -- while increasing to 195.2 million barrels for the week ended May 12 -- remain well below the average for this time of year.
Analysts polled by Dow Jones Newswires expect gasoline stocks to grow by an average of 800,000 barrels, while crude oil supplies are forecast to drop by 200,000. Analysts estimate distillate stocks, which include heating oil and diesel fuel, will increase by an average of 900,000 barrels.
Gasoline futures also ended lower ahead of the report, declining 9.5 cents to US$2.3063 a gallon.
But retail gasoline prices keep rising, nearing inflation-adjusted highs. On Monday, the EIA said that the national average retail price for regular grade gasoline rose 11.5 cents to US$3.218 a gallon (85 cents a liter), just shy of the inflation-adjusted high of US$3.223 a gallon reached in March 1981. The nominal price in March 1981 was US$1.417 a gallon.
BP PLC said it will reduce crude oil production by 100,000 barrels at Prudhoe Bay in Alaska for a "few days" because of a water pipeline leak. However, the temporary cutback shouldn't dramatically affect US oil production, but traders would rather "get production here rather than elsewhere," said Phil Flynn, an energy analyst at Alaron Trading Corp in Chicago.
The government yesterday predicted 13 to 17 tropical storms, with seven to 10 of them becoming hurricanes this season. The likelihood of above normal hurricane activity is 75 percent, the National Oceanic and Atmospheric Administration said.
Weather has played an increasingly important role in oil prices in recent years. Prices surged to US$70 a barrel for the first time in 2005 as Hurricane Katrina ravaged the Gulf of Mexico Coast. They broke above US$78 a barrel in July 2006 on worries of another bad storm season, and then sank to US$60 a barrel when those expectations were not met.
Continued violence in Nigeria before the inauguration of a new president also has underpinned oil prices. Nigeria is one of the world's largest crude producers, and attacks on oil installations have become an almost daily occurrence following elections there last month.
In other Nymex trading, heating oil futures fell 4.37 cents to settle at US$1.9072 a gallon, while natural gas prices dipped 11.2 cents to US$7.801 per 1,000 cubic feet.