Oil hits its low for the year

Crude plunges over $2 as traders say swelling inventories leave no place for storage.

By Steve Hargreaves, CNNMoney.com staff writer

NEW YORK (CNNMoney.com) -- Oil prices sank over 4 percent Thursday, hitting a new low for 2006, as swelling inventories and the December contract's expiration on Friday forced traders out of the market.

On the New York Mercantile Exchange, December crude tumbled $2.50 to settle at $56.26 per barrel. Crude hit a low of $56.20 during trade, its lowest since November 2005.

"The storage at Cushing is full, if you're long you would have to take delivery." said Nauman Barakat, an energy trader at Macquarie Futures, the trading arm of Macquarie investment bank. "Basically this is confirming that inventories are very high."

Barakat was referring to the storage tanks at Cushing, Okla. where oil is stored until it is shipped to an industrial user, like a refinery.

But with the February crude contract currently trading higher than the December contract, there is no incentive for traders to sell their product, said Sal Gilbertie, an energy trader at Fimat in New York. Instead, they are just keeping it in Cushing.

Besides, said Gilbertie,"If you take delivery and there's no place to put it, what are you going to do? You're dead. No one's buying."

Crude inventories have been growing for weeks as the summer driving season came to an end in the United States and domestic production escaped damage from a hurricane season that never materialized.

The swelling inventories have helped push oil prices down over the last several weeks.

Crude has fallen nearly 25 percent from a trading high of $78.40 reached in July.

Concerns over a slowing economy and easing of tensions in the Middle East were some of the other reasons for crude's decline, followed by a bail out of big money investment funds that further depressed prices.

However, the slide had been stemmed until recently.

Crude has been hovering around $60 a barrel for the last several weeks as OPEC talks of a production cut and the general supply and demand situation remains tight - crude is three times more expensive now than it was at the start of 2002.

Traders will still be paying close attention to weekly inventory reports to see if OPEC is making good on their threat to cut production by just over 1 million barrels.

But with inventories so high, even that might not be enough.

"Even a cut of 1.1 million isn't going to do the job," said Barakat.

Stocks of major oil companies such as Exxon Mobil (Charts), ConocoPhillips (Charts), Chevron (Charts), Royal Dutch Shell (Charts) and BP (Charts), which often track the price of oil, were all lower in early afternoon trading on the New York Stock Exchange Thursday.


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