Oil plunges for year, losing 4 years of gains

COLUMBUS, Ohio -- Oil prices jumped 14% on New Year's Eve, capping a year that saw prices soar to unprecedented heights only to give up four years of gains in just five months.

The unprecedented collapse in energy prices that began in July came as the world's leading economies sank into recession.

True to a year that has been volatile from the start, crude prices spiked on the final day of 2008, no where even close to wiping away the most severe price declines since crude started trading on the New York Mercantile Exchange in 1983.

Light, sweet crude for February delivery on New Year's Eve rose $5.57 to $44.60 a barrel on Nymex with trading volumes low.

Few market analysts believe crude prices will not fall further and instead saw Wednesday's spike as a blip.

Prices rose quickly after the government reported that U.S. refineries ran at 82.5% of total capacity on average for the week ended Friday, a drop of 2.2% from the prior week and below analysts' expectations that it would remain flat.

Some refiners shut operations at the end of the year for repairs, meaning that demand could outstrip supply in a few weeks, said Peter Beutel of Cameron Hanover.

Also, Russia's state gas monopoly Gazprom's decision to cut off gas supplies to Ukraine on Thursday might have played a role. A cutoff has raised fears of disruptions in supplies to Europe. Gazprom supplies a quarter of the gas used by EU nations, and about 80% of it goes through Ukraine.

Oil's collapse ended a bull market that began in 2002, when crude traded at $17.85 a barrel. Prices jumped 57% in 2007 to $95.98 a barrel. Prices increased rapidly 2008, fueled by speculation that soaring growth from China, India and other emerging economies would outpace demand for crude. A a weaker dollar helped drive up prices to a record $147.27 a barrel on July 11 as investors dumped investments in the U.S. currency for oil.

Prices, which many industry analysts described as out of control, tumbled in July as a credit crisis in the U.S. mushroomed into a global slump in consumer spending and industrial production.

Not even Hurricanes Gustav and Ike in the Gulf of Mexico in September or the Middle East conflict between Israel and Hamas has been able to stop crude's slide.

Demand for oil has fallen so fast, buyers have had difficulty finding somewhere to store it.

The January contract, which expired Dec. 19, settled at $33.87, the lowest level since early 2004, as brokers and traders attempted to unload supply for whatever price they could get. U.S. stockpiles have risen at the key storage facility in Cushing, Oklahoma, and tankers carrying millions of gallons of crude float around the world with no destination in mind in hopes that prices will rise.

"For 25 years I've been watching this market like a hawk and I've never seen a year like this nor would I anticipate a year like this," said Jim Ritterbusch, president of Ritterbusch and Associates.

Ritterbusch said that excess liquidity early in the year spurred hedge funds to invest in oil, positions that they were forced to sell in the second half of the year as credit began to dry up.

Record prices at the pump slashed demand as Americans cut spending across the board. Americans drove more than 100 billion fewer miles between November 2007 and October 2008 than the same period a year earlier, making it the largest continuous decline in American driving in history, according to the Federal Highway Administration.

But Ritterbusch thinks with prices barely above $1.60 a gallon, demand for gasoline will pick up in 2009.

There are signs that Americans are returning to the pump slowly.

Ritterbusch noted that figures released Wednesday by the U.S. Energy Department's Energy Information Administration, show demand for gasoline fell 3.3% in 2008, but are down just 2.2% in the past four weeks.

Oil prices may have further to fall, however, he said, before rebounding to an average of around $60 next year.

In another sign of falling demand Wednesday, the U.S. government reported that crude stockpiles rose again last week, despite expectations for a steep drop, while gasoline reserves jumped less than forecast.

For the week ended Dec. 26 crude inventories rose by 500,000 barrels.

Analysts polled by Platts, the energy information arm of McGraw-Hill Cos., expected a draw of 1.75 million barrels.

In London, February Brent crude rose more than 7%, or $2.90, to $43.05 a barrel on the ICE Futures exchange.

In other Nymex trading, gasoline futures rose 12.77 cents, to $1.013 a gallon. Heating oil rose 9%, or 11.7 cents to $1.405 a gallon, while natural gas for February delivery tumbled 31.7 cents to $5.542 per 1,000 cubic feet.