U.S. oil prices dropped more than 4% to settle at $58.80, the lowest close since November 20th for the front-month contract.
U.S. oil on Friday -- the last trading day of 2006 -- settled at $61.05, only 1 cent higher than at the end of 2005 and well below the record high of $78.40 hit in mid-July last year.
Warm weather in the United States, especially in the giant Northeast heating oil market, has dragged down oil prices since late December. Prices have also been undermined by a lack of fund interest as investors appeared to favor buoyant equity markets over commodities.
DTN Meteorlogix predicted temperatures in the U.S. Northeast would be up to 16 degrees above normal this week. Other forecasters also saw warmer-than-average temperatures until next week.
The National Weather Service said on Tuesday demand for heating oil in the week to Jan. 6 would be about 33% below normal.
Lower than normal heating oil demand is helping to offset any impact from supply cuts being implemented by the Organization of the Petroleum Exporting Countries.
The group has said it will reduce output by a further 500,000 barrels per day from Feb. 1, adding to a 1.2 million bpd cut from Nov. 1.
But Nigeria's top oil official, Edmund Daukoru, told Reuters he expected OPEC supply cuts would balance the market and said that Nigeria planned to comply fully with its share of the output reduction.
At the start of 2006, the price of U.S. crude shot up to $69.20 by late January after investment funds piled into the crude market, from $61.04 at the end of December 2005.
Many subsequently lost money as oil prices slid from their record high.
Analysts said this January some funds appeared to be unenthusiastic about oil, although many market participants were still away following Christmas and New Year holidays.
"Pretty much all commodities have got hit hard today and if the commodity markets overall do not rally this week, it would indicate that new investors' money has taken a pass on commodities in general and oil in particular," said Nauman Barakat, senior vice president at Macquarie Futures USA.
U.S. shares opened the first session of 2007 with sharp gains on Wednesday and European shares were close to six-year highs.