U.S. front-month February crude oil futures retreated from early highs above $53 to end a choppy trading session 1.7% lower as the February contract expired at the end of the session.
February crude on the New York Mercantile Exchange settled down 86 cents, or 1.65%, at $51.13 per barrel, after trading between $50.80 and $53.44.
Some traders said crude fell prey to a drop in heating oil prices.
Natural Gas rallied more than 40 cents in the last hour of trading to settle at $7.350 per million BTUs, its highest close since December 15th. Natural Gas is now up 16% so far this year.
Temperatures in the Northeast were expected to average below normal for the next six-to-ten days, private forecaster DTN Meteorlogix has said. It added temperatures in European cities
will mostly drop in the next few days.
Investment fund selling in early January and a mild start to the northern hemisphere winter have wiped about 14% off oil so far this year. Prices are well down from their July 2006
record of $78.40, easing the strain on world economic growth.
News of a 6.8 million barrels increase in U.S. crude stocks on Thursday tipped oil to $49.90 a barrel, but some analysts say the break below $50 was unconvincing.
"There was a strong bounce off $50 -- there are a couple of signs the market may have bottomed," Tony Nunan of Mitsubishi Corp.'s risk management unit said.
Edward Morse, chief energy economist at Lehman Brothers, said the market could easily recoup $10.
"A series of unanticipated fund flows triggering 'black box' selling by traders dragged the market down far further than fundamentals warranted," he said.
The latest investment flow data published by New York's Nymex exchange showed large speculative funds had already begun to reduced their net short position in U.S. crude oil, Olivier Jakob at Swiss-based analysts Petromatrix said. "The data suggest a break of $50 will be met by enough buying power and if the trend does not reverse then a bottoming trading range seems more likely than a further collapse," he said.
For the time being, OPEC appears to have ruled out an emergency meeting to address the price decline. Algeria's Energy and Mines Minister Chakib Khelil told state radio on Sunday leading exporter Saudi Arabia was against emergency such a move.
Libya's top oil official Shokri Ghanem said OPEC members were seeking full compliance with existing output cuts.
OPEC has trimmed production twice since November. It first pledged to implement a 1.2 million-barrel cut from Nov. 1 and later added a further 500,000 bpd cut from Feb. 1.