Oil closed lower after choppy trade yesterday, dragged down by falling heating oil prices ahead of a spell of mild weather in the northeast United States.

London Brent blend for March delivery last traded 38 cents weaker at $26.60 a barrel after falling to a daily low of $26.25 a barrel. Earlier in the session, Brent traded as high as $27.48. U.S. light crude last traded 72 cents lower at $29.05 a barrel.

Oil prices had made gains earlier and then took a sharp fall on the back of heating oil which lost ground as Weather Services Corp predicted above normal temperatures in the high-consumption northeast market for the next 10 days.

Heating oil for February delivery last traded 3.56 cents, or 4.21 per cent, lower at 81 cents per gallon. Rising U.S. stocks of distillates, including heating oil, have eased fears of supply shortages this winter.

Oil's early gains came as dealers pinned their hopes on an aggressive interest rate cut this week by the United States to re-invigorate economic growth. Traders said they were waiting for this week's U.S. Federal Reserve policy-setting Federal Open Market Committee (FOMC) meeting that is widely expected to cut U.S. interest rates by about half a percentage point.

"Although most are expecting an interest rate cut, the FOMC meeting is holding quite a few people back from taking new positions," said a London oil futures dealer. The FOMC meets over the next two days and a decision is expected at 1915 GMT tomorrow.

A rate cut could provide support for oil prices by re-invigorating the U.S. economy and fuelling demand for crude. Many energy analysts already have downgraded their forecasts for oil demand growth this year. Lehman Brothers in a monthly report said its estimate of global economic growth had been shaved from 3.4 per cent to three per cent.

"As a result we are cutting our 2001 oil demand forecast from 1.8 per cent to 1.3 per cent. This reduces our estimate of 2001 world oil demand by 300,000 bpd to 77.6 million bpd," the bank said.

Saudi Arabia said at the weekend that whatever the outlook for oil demand, Opec was prepared to defend $25 a barrel for a basket of Opec crudes. "I believe we will succeed in maintaining a stable price around $25," Saudi Oil Minister Ali Al Naimi told a panel at the World Economic Forum's annual meeting in Davos. The Opec crude basket was valued on Friday at $25.14 a barrel. Naimi said he saw no reason why current oil prices should have an impact on world economic growth.

"According to recent analysis most of the highly industrialised fully developed countries in Asia, Europe and North America are able to absorb the effects of increased crude oil prices," he said. In Singapore, the Asian crude market was quiet yesterday with plenty of sweet crudes available, but sellers were asking firm premiums.

Traders said they expected the March market, which still has at least two to three weeks more to trade, to do better than February. Good support was likely to follow, after a buying spree in the last two weeks helped clear the cheaper Middle East sour crude supplies.

"March is very slow to pick up, but there is still plenty of time. It is hard to read the market at the moment," one trader with a major oil company said. Traders said there were some trades so far only for naphtha-rich light sweet crude grades.

A Japan refiner heard bought 600,000 barrels of Australian Northwest Shelf (NWS) for end March loading cargo from a Japan trader at +5/+10 cents over the NWS quotes. The timing of the trade was unclear.

Another seller, a European major was asking the same price for NWS. Traders said that a Philippines refiner bought Laminaria crudes at Tapis APPI flat/-10 cents via a tender. Other crudes like Malaysia's Tapis, Labuan, Miri, Masa and Australian Cossack were offered at around +20/+30 cents premium levels over Tapis APPI, with no firm trades heard.

Indonesia picked up its regular demand of 1.9 million barrels through a first March tender, traders said. Pertamina awarded Nanhai Light, Benchamas and Saharan Blend. The Middle East crudes market was quiet. Traders said that only partial March lifting Murbans were available for March, after the last Oman trade at MOG +43 cents <ACRU/T> but these could be rolled over into April.

On the Dubai market, there were some 3-4 cargoes seen unplaced and talked at quotes +30/+40 cents levels.