Tuesday, October 19, 2004

Prices fall sharply after hitting new high



By Brad Foss
The Associated Press

Oil prices fell sharply Monday in what traders described as a wave of profit-taking after futures hit a new high above $55 a barrel and after gasoline futures fell sharply on indications of declining demand.

THE PRICE WE PAY FOR BLACK GOLD

When the price of crude oil rises in the world's commodity markets, it eventually affects consumers in Greater Cincinnati and Northern Kentucky. Consider:

GASOLINE PRICES

Higher gas prices mean less money in your pocket for other things. And prices are high now - particularly for the fall, when the cost of filling up tends to be lower than in summer. The average price for a gallon of unleaded gas hit $2.04 in Southwest Ohio on Saturday, just a penny off the record set this summer. The price Saturday (the last day for which data is available from the Oil Price Information Service) in Northern Kentucky was $2.07, seven cents off the record.

Through August, the average American household has spent $330 more on gasoline than in the same period of 2003, according to Steve Spiwak, economist at Retail Forward in Columbus.

Sung Won Sohn, chief economist at Wells Fargo Co. in Minneapolis, said the higher price at the pump amounts to a cut in income. For the bottom 20 percent of households (based on income), the rise in oil prices means they'll spend 15 percent of their income on gasoline, compared to 7 percent in 2002. For upper-income households, gasoline will eat 3 percent of their income, compared to 1.7 percent in 2002.

Gas prices "are certainly having an impact on consumer spending," Spiwak said, "but it has been offset somewhat by gains in income."

RETAILERS

If consumers have less money to spend, stores will suffer.

Wal-Mart CEO Lee Scott, reporting first-quarter earnings in May, noted "the impact higher gasoline and petroleum prices will have on our customers."

Consumers have told Retail Forward that they are coordinating trips to supermarkets and generally driving less. They are also shopping closer to home. "That's particularly true with low-income households," Spiwak said. "There has been a modification of behavior."

AIRFARES

For two years, the nation's airlines have tried repeatedly to raise prices and recoup staggering losses. But every time, the increases wouldn't stick, either rebuffed by low-cost competition (such as Southwest) or by other major carriers (such as Northwest) clinging to market share. But in the past two weeks, several attempts have stuck - most recently a $5-each-way increase started by American that was matched by all carriers.

Delta Air Lines has gone along with most of the increases (except on international flights). "If you look at what consumers are paying at the pump versus airfares in general, it is still a bargain to fly," said Delta senior vice president and chief marketing officer Paul Matsen.

TRUCKING

The national average for diesel fuel hit an all-time high last week at $2.18 a gallon, according to the federal Energy Information Administration. And that has led to more trucking companies than ever imposing or raising fuel surcharges - a move that eventually could lead to higher retail prices.

The surcharges "are more prevalent than they have ever been," said Tavio Headley, staff economist for the American Trucking Association. But it isn't clear whether regular trucking rates have gone up as well, he said. One of the area's largest trucking companies, R&L Carriers of Wilmington, says it has not yet raised its rates.

--John Eckberg, James Pilcher and John Byczkowski


 
chart
November crude futures plunged $1.26, or 2 percent, to settle at $53.67 a barrel on the New York Mercantile Exchange. November gasoline futures sank 5.9 cents, or 4 percent, to $1.3504 a gallon.

The slide in prices might not last, analysts said, explaining that it could provide the basis for fresh buying in a market that is still ill at ease about the world's limited supply cushion.

"I think the mantra 'buy the dips' is still firmly in place," said Aaron Kildow, a broker with Prudential Financial Inc.

Ed Silliere, vice president of risk management at Energy Merchant, attributed Monday's downward momentum to profit taking, which began after oil prices briefly surpassed $55 a barrel, as well as to signs of lower demand for gasoline.

"It's more than the normal seasonal drop-off in demand," Silliere said, "and we think it's price related."

The Energy Department reported last week that the average daily demand for gasoline for the four weeks ending Oct. 8 was 8.94 million barrels, down 0.4 percent from the same period a year earlier.

Meantime, the average retail price of gasoline nationwide is slightly above $2 a gallon, just a nickel below the May peak, according to the Oil Price Information Service, a Lakewood, N.J., provider of industry data.

Crude oil prices are up about 75 percent from a year ago. However, even at current levels, crude oil prices are still about $27 below the all-time highs - in inflation-adjusted terms - of February 1981.

Prices have skyrocketed about $10 in the past month, primarily over production delays in the Gulf of Mexico, where Hurricane Ivan hit mid-September.

Declines in U.S. inventories of heating oil, diesel and jet fuel just before the Northern Hemisphere winter are the latest in a line of supply factors to rattle the market.

The U.S. Energy Department said in its weekly petroleum supply report last week that commercially available supplies of heating oil declined by 1.2 million barrels for the week ending Oct. 8, falling to 50 million barrels, or 10 percent below year-ago levels.

But given today's soaring price of heating oil, Silliere said he expects the industry to begin cranking out large amounts of fuel. Once refiners perform seasonal maintenance "they're going to make nothing but heating oil."

Heating oil prices fell 3.94 cents to $1.5097 a gallon Monday afternoon on Nymex.

Others remain concerned about winter fuels.

"We are heading for winter, and stocks in the U.S., Europe and Japan are significantly lower than they were a year ago," said Axel Busch, the chief correspondent for Energy Intelligence Group in London. "If we get a cold snap, or a cold winter, we will see prices go higher."

In the Gulf of Mexico, more than 20 million barrels of crude remain shut in as recovery efforts continue to get production levels back to normal, the U.S. federal Minerals Management Service said on its Web site.

But with the amount of excess capacity - immediate surplus supply - at about 1 percent of daily demand, now estimated to be above 82 million barrels, any supply outage is expected to factor into prices.

"Anything that's slightly bullish could scare the market right back up," Prudential's Kildow said.

Market players have been fixated on potential disruptions in production, such as the just-concluded oil workers' strike and threats of rebel attacks in Nigeria, Africa's largest producer, and sporadic attacks by militants on Iraqi pipelines.

Unrest in the world's largest producer, Saudi Arabia; the tax battle between the Russian government and oil giant Yukos; and political tensions in key producer Venezuela have also weighed in recently.

In other Nymex trading, natural gas futures rose 9.7 cents to $6.806 per 1,000 cubic feet. In London, Brent crude futures fell $1.02 to $48.91 a barrel.




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