Oil prices heat up fears of costly winter heating season

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Just a few weeks ago, it looked as though homeowners who heat their homes with oil would be getting off cheap this winter. After last year's record prices, the cost per gallon of home-heating oil had retrenched to much more reasonable levels in recent months, among the lowest seen in years. Analysts said a flood of oil in world markets and healthy stores of sweet crude in U.S. warehouses meant oil prices would be kept in check.

But with prices now expected to hit $80 a barrel and gush even higher, it looks as though dreams of a cheap winter heating season are slipping away.
Of course, it's not only the price of home-heating oil flaming up; it's gasoline, too. As the cost for each barrel has moved higher in recent days to a touch over $79 a barrel on Monday from $70 a barrel in just a matter of days, signs displaying the price for various grades of gasoline at the local service station have changed frequently -- each time adding a penny or two to each gallon of the stuff the helps drive the U.S.'s consumer economy, by keeping shoppers in their cars and out at the malls.

AAA reported that the national average price for regular grade gasoline hit $2.56 a gallon -- the highest price seen in several weeks, according to a daily survey conducted by the auto club.

So what's the cause behind the upward trend in oil prices and how did analysts get it so wrong? A weak dollar combined with a report last week noting a surprising drop in the number of barrels of oil the U.S. has on tap has caused oil futures to rally. Crude oil prices also appear to be riding Wall Street's coat tails. The Dow Jones industrial average ($INDU) surpassed 10,000 last week, signaling that the economy is gaining momentum and increased demand for oil products is likely not far behind.

"Optimism from equities still seems to be channeling into the oil market," Thina Saltvedt, an analyst at Nordea Bank AB in Oslo, told Bloomberg News. Consumer demand for oil remains weak, despite better economic news, Saltvedt said, adding that while oil prices may top $80 a barrel, they won't stay there.

The rally in oil prices is based much more on hope than reality, said Michael Lynch, president of Strategic Energy & Economic Research. He told the Associated Press, "There's so much oil out there that people are going to start using it for their pancakes."

Homeowners in the Northeast, where the bulk of heating oil in the U.S. is used, and drivers across the country are banking that those sentiments are on the money. Otherwise, higher prices for oil products could put a damper on holiday sales, tanking any promise of a happy new year.
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