Oil prices closed below $88 per barrel Monday, on forecasts that warm weather in the United States would slash demand for heating fuels, adding to a weak outlook for the nation's energy use amid an economic slowdown.
Prices had been in positive territory earlier in the day after news that fog on the Houston Ship Channel was slowing shipping, potentially straining U.S. crude stockpiles that have already dropped to their lowest in more than two years.
U.S. light, sweet crude futures settled down 42 cents to $87.86 per barrel.
London Brent crude fell 43 cents to $88.21 per barrel.
"For today's trading at least, fears of energy demand contraction have taken dominance," said Mike Fitzpatrick, vice president at MF Global. "But that may be reversed just as quickly tomorrow."
U.S. heating demand will be about 13 percent below normal this week as temperatures rise above average in the key heating regions, the National Weather Service forecast in a weekly report Monday.
U.S. oil prices had already been in a tailspin since hitting a peak $99.29 Nov. 21 amid signs of a weakening U.S. economy that energy traders are concerned could sharply cut into demand for fuel.
Leading U.S. investment bank Morgan Stanley said in a research note Monday the U.S. economy is likely headed to a recession, pulled down by ongoing tightening in credit markets that is curbing business spending.
The U.S. Federal Reserve will meet Tuesday and is widely expected to cut interest rates by a quarter point after better-than-expected U.S. employment data Friday reduced the likelihood of an aggressive 50 basis-point reduction.
The fall in oil prices was tempered after the U.S. Coast Guard said dense fog had delayed 54 ships from entering the Houston Ship Channel, a 53-mile-long waterway leading to the busiest U.S. petrochemical port.
Fog in late November cut deeply into U.S. crude imports and led to a decline in oil inventories to their lowest since March 2005.
Also stemming oil's slide, the Organization of the Petroleum Exporting Countries last week agreed to leave its output levels unchanged, despite calls from consuming nations for more oil to meet winter demand.
"OPEC rolled over quotas as we expected; this was constructive, as OPEC demonstrated its intent to continue to tightly manage its crude supply," Mike Wittner, oil analyst at Societe Generale, said in a research note.
U.S. Energy Secretary Sam Bodman said Monday that he had hoped OPEC would raise production at the meeting to stem falling inventory levels.