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Why oil prices are stubbornly high

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Year-end, inventories tend to be low

Although oil inventories are low, some energy analysts expect them to be restocked this year. Oil companies normally try to reduce their inventories at year-end, says Rick Mueller of Energy Security Analysis Inc. of Wakefield, Mass. "But there is no question: We are at the lower end of the comfort zone," he says.

Oil inventories are down 60 million barrels since July, Mr. Mueller says. "It's a disturbing trend," he says.

On Wednesday, the Energy Information Administration reported that crude-oil inventories fell 6.8 million barrels for the week ending Jan. 4 – the eighth consecutive week they have dropped. One trader blamed bad weather around the Houston ship channel last week. He expected an adjustment next week. Nonetheless, the price of oil jumped on the news.

Part of the reason for the decline in inventories: The price of oil for next December on the New York Mercantile Exchange, a futures market, is about $3 a barrel lower than the price of oil today. "It does not pay to hold inventory," says Lucian Pugliaresi, president of Energy Policy Research Foundation Inc. in Washington. "That indicates the market is perceiving the fundamentals of supply and demand will lead to a lower price in the future."

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