Jan. 8 (Bloomberg) -- Blame it on global warming.

Record-breaking temperatures in the U.S. and Europe are reducing fuel demand and contributing to the biggest fluctuations in oil in more than a year. Wall Street has never been more divided on the direction of crude, adding to price swings.

Oil is down from a record $78.40 a barrel in July, when forecasters said hurricanes made stronger by climate change may tear up Gulf of Mexico production plants. Crude dropped 7.8 percent to $56.31 a barrel last week as New York City broke a 129- year record for making it this far into winter without snow. The U.K. said 2007 may be the warmest year ever.

``The bulls have been bowled over by the weather,'' said Adam Sieminski, the chief energy economist at Deutsche Bank AG in New York, who forecasts an average of $62 oil for 2007. He said recent mild temperatures stem from a cyclical El Nino weather pattern and to a lesser extent from global warming.

The volatility is forcing airlines and manufacturers to change strategies designed to lower fuel expenses. The costs of contracts that hedge against price increases have surged, increasing any potential losses from a wrong-way bet.

``Our advisers are telling us to go slow now as prices are very volatile'' and to limit jet-fuel hedges, said Sudesh Punhani, finance director for Air India Ltd., the nation's largest airline. ``We still have the option to hedge more, but we haven't utilized it.''

Trading Boon

The swings in oil prices bring profits for traders such as Goldman Sachs Group Inc. and Morgan Stanley, Wall Street's two largest firms in the commodity markets. Each bank generated $2.5 billion in revenue from energy and commodity trading last year, according to estimates from London-based Coalition Development, an adviser to the financial services industry.

``The worst thing on a trading desk is a steady market,'' said Sebastian Walker, Coalition Development's head of business intelligence. ``More volatility means more opportunities.''

The profits are magnified in commodities markets because a $4,050 investment can be used to control a 1,000-barrel futures contract valued at $56,310 as of Jan. 5. Last week's decline led to a $4,740 profit for anyone who bet against crude, meaning traders may have more than doubled their money in five days.

Wall Street Divided

Trading in oil on the New York Mercantile Exchange is at a record and is the most volatile since November 2005. Wall Street is split on whether oil's plunge will continue. The median 2007 estimate for Nymex crude is $62.70, according to data compiled by Bloomberg.

Prices this year will average $76 a barrel, says Paul Horsnell, the Barclays Plc analyst who predicted crude's rise to a record in 2006. Not so, says BNP Paribas SA's Eoin O'Callaghan, who projects $57.90.

Horsnell and other analysts who see higher prices this year anticipate rising demand from China and India and limited production gains from non-OPEC nations. Bearish forecasters such as O'Callaghan say slower world growth and warm weather will reduce consumption.

There is a 60 percent chance that this year will be hotter than 1998, the warmest year on record, the U.K. government's weather forecasting division said Jan. 4.

The third-warmest December ever in New York caused cherry trees to blossom at the Brooklyn Botanic Garden four months ahead of schedule. World Cup officials canceled skiing events in Austria and France because of a lack of snow.

The global average temperature ``has been as warm as it has been in a very long time and we're headed into uncharted territory in terms of how much heat-trapping gas is in the atmosphere,'' said K.C. Golden, 47, policy director at Climate Solutions, an Olympia, Washington-based group advocating measures to manage man- made climate change.

`More Volatility'

``What we're doing is systematically loading the dice for warmer and warmer winters, more extreme weather events and all the other things scientists tell us come with global warming,'' Golden said in a telephone interview.

Abnormal temperatures that disturb energy demand and cause price swings are here to stay, said John Dearborn, energy vice president at Dow Chemical Co., the largest U.S. chemical maker.

``When you see almost every forward forecast from the big analysts and market watchers out there having at least two and sometimes three scenarios, each with different pricing, you have to say the future is only going to have more volatility,'' he said in an interview. ``It's the long-term trend.''

At Dow, based in Midland, Michigan, energy and raw material costs jumped about $2.35 billion through the first nine months of 2006, and $4 billion in 2005. Southwest Airlines Co. and rivals American and United raised fares this month to help cover fuel costs, after 10 increases last year.

Locking in Prices

``We've been in a very volatile market,'' said Scott Topping, Southwest Airlines' vice president and treasurer in Dallas, who oversees its hedging program and expects fuel costs to rise $300 million this year.

Southwest, the largest low-fare carrier, has locked in 85 percent of its fuel needs for this year at $49 a barrel, up from the 80 percent the airline contracted in 2006 at $39 a barrel.

Barclays's Horsnell, formerly of JPMorgan Chase & Co. and the Oxford Institute of Energy Studies, expects a 15 percent gain this year. His forecast, the highest in data compiled by Bloomberg, runs counter to the consensus.

North Sea Brent crude traded on London's ICE Futures exchange is expected to average $61.73 a barrel this year, according to the median of analyst estimates, compared with the 2006 average of $66.11.

Crude prices will climb because new supplies won't increase quickly enough outside the Organization of Petroleum Exporting Countries, Horsnell said.

Tight Supply

``The major difference we've got is the non-OPEC supply forecast, where we are about 1 million barrels a day short of the consensus viewpoint,'' he said in a Jan. 3 interview in London. ``The pack is more or less looking for prices not to change from current levels.'' One million barrels is more than the daily output of OPEC member Qatar.

Crude oil futures in New York peaked in July partly because of violence in the Middle East and concern that Iran's defiance of United Nations nuclear inspectors might disrupt the nation's exports. Prices retreated as a mild 2006 hurricane season left U.S. facilities unharmed and Middle East tensions eased.

BNP Paribas's O'Callaghan says oil will fall further. High prices have slowed economic growth and contributed to rising interest rates in Europe and the U.S. last year.

``We are looking for a hard landing in the U.S. and a knock- on effect around the world,'' O'Callaghan said. ``Also there should be a large addition of non-OPEC production, which will cause prices to resume their downward move.''

Slowing Economy

New York crude futures ended last year at $61.05, 1 cent higher than at the end of 2005. A drop in the average price this year would mark the end of a five-year rally that began after the Sept. 11, 2001, terrorist attacks.

The U.S. economy, the consumer of a fourth of the world's oil, grew at a 2 percent annual rate in the third quarter, down from 5.6 percent in the first quarter, according to Commerce Department data. The International Energy Agency may lower its forecasts for oil demand because of slower U.S. growth, the agency said Dec. 13.

Wall Street's consensus on oil has been below market prices throughout a three-year rise in prices. The median forecast for 2006 was $58 a barrel, and the actual average was $66.25.

``The bullish factors are the same we've seen for the last couple of years,'' said Antoine Halff, a vice president and head of energy research at Fimat USA Inc. in New York. Increases in oil output failed to keep pace with demand, especially from the U.S. and China, leaving little cushion of extra supply to make up for interruptions of exports.

China's Growth

The Chinese economy will grow more than 10 percent in each of the next two years, the Organization for Economic Cooperation and Development said Nov. 28. China is the world's second-biggest oil consumer, after the U.S.

Oil's surge in the first half of 2006 came amid disruptions of supplies from Nigeria and Iraq. The two countries, along with Iran, were responsible for almost 10 percent of global production last year.

``We first set the price forecast for 2007 in June and haven't changed it,'' said Deutsche Bank's Sieminski. ``We still feel the major threat to the market is a slowdown in the U.S. The main upside risk remains geopolitical.''

New York oil futures began to bounce back from last week's slump and rallied 1.6 percent to $57.19 a barrel as of 10:08 a.m. New York time, responding partly to a halt in Russian crude oil pipeline deliveries to Poland and Germany following a dispute between Russia and Belarus.

To contact the reporters on this story: Mark Shenk in New York at mshenk1@bloomberg.net; Stephen Voss in London at sev@bloomberg.net.

Last Updated: January 8, 2007 10:13 EST