Crude hits 18-month low; speculators unload

0

CHICAGO – Fears of super-high-priced oil, including petroleum reaching $100 a barrel, are receding, at least for now, as crude’s cost continues to plunge.

Petroleum prices started falling last autumn and have yet to stabilize, bringing cheaper gasoline and a small but welcome boost to the economy.

Warm winter weather in the U.S. is credited for the latest decrease in oil, which has fallen $5 a barrel since the start of the year. But other, more nuanced factors also are working to push down oil prices that reached a record $78 a barrel in August and caused some to worry about prices hitting triple digits.

On Thursday the benchmark price of oil fell $2.14, to $51.88 a barrel, its lowest point in a year-and-a-half. Industry analysts say commodity speculators are moving out of the international market for oil, depressing its price as they depart.

A slowing U.S. economy also has dampened demand. Meanwhile, natural gas and oil production lost from Hurricane Katrina in 2005 has been restored, while producers here and abroad have upped output.

Motorists have yet to see the full benefit, as gasoline prices traditionally fall more slowly than they rise. But a gallon of regular gasoline in the United States sold for an average of $2.281 on Thursday, according to the AAA auto club. In September 2005 it hit a record $3.057 a gallon.

The effects of cheaper oil will ripple through the economy in months ahead. Inflation likely will remain restrained, and for some industries, airlines for example, low fuel costs will bring a financial boon.

Some analysts are saying oil prices could go lower.

“We think the mid-$40s is the long-run price of oil,” said Justin Perucki, an equity analyst with Morningstar. “We think prices will continue to slide over the next couple years.”

Analysts say warm weather across the U.S. has brought down prices. Refiners typically step up production of home heating oil, used mainly in the Northeast, during the winter, then switch to more gasoline in the spring as the summer driving season approaches. Demand for home heating oil is weak this year, reflected in unusually high inventories of petroleum products.

Phil Flynn, energy analyst for Alaron Trading Corp. in Chicago, thinks hedge funds and speculators ran up the price of oil last year and are getting out now.

“The stock market has been doing pretty darn good. You are seeing money move out of commodities and back into the stock market,” Flynn said.

There is evidence to back Flynn’s observation. This week ABN Amro Bank noted that other commodities, such as copper, and aluminum, have fallen sharply in recent weeks because speculators were bailing out.

The significance of oil prices is starkly obvious in the airline industry, where jet fuel has overtaken labor as the leading operating expense for most air carriers.

Lower fuel prices, which come as a record number of passengers take to the skies, are one of several factors that could make this a banner year for U.S. airlines, analysts say.

After losing money heavily for much of this decade, U.S. carriers are poised to earn a cumulative profit of $6 billion in 2007, said Ray Neidl, airline analyst with Calyon Securities, a New York-based investment bank.

“In the short-term, fuel-cost savings pretty much go straight to the bottom line,” said Sandy Rederer, a Virginia-based airline consultant.

But analysts don’t expect the airlines to share their newfound wealth with passengers by lowering airfares during popular travel times.

Airlines will continue to raise fares during holidays and summer months when families take to the skies and flights sell out.

“The continued strong demand should allow the airlines to keep testing higher fares,” said Roger King, senior analyst with CreditSights Ltd.

For motorists, the best may lie ahead. “If crude stays in the mid-$50s, retail (gas) prices will be less in the summer,” said David Sykuta, executive director of the Illinois Petroleum Council, which represents the state’s refiners.

Sykuta said cheaper oil isn’t the only factor that will push down gasoline prices.

“The Europeans are really helping us out,” he said. “Their market has switched so heavily to diesel, so we tend to get their gas cheap.”

It is no secret that retail gas prices move up much more quickly than they go down as oil costs change.

“Retailers are in the business to make money,” Sykuta observed. “It’s not the United Way.”


But one economist said consumers play a role in gas prices remaining elevated when crude costs drop, due to the relationship between competition and prices. Matthew Lewis, an assistant professor of economics at Ohio State University, has studied consumer behavior when purchasing gasoline. He said people search harder for deals when gas prices go up and skip the effort when they drop.

“When retail prices are going up, consumers think they can shop around and find a better price,” Lewis said. “The opposite is the case when prices are going down. They don’t shop around. They just buy it because they think they are getting a good deal.”

As a result, there is less competition driven by prices, and gas stations are slower to lower their prices.

By making nearly everything less costly to make or transport, lower energy costs act as a stimulant to the economy.

Peter Morici, a University of Maryland School of Business professor and former chief economist at the U.S. International Trade Commission, said the effects will be beneficial but not dramatic.

Morici had expected the gross domestic product to expand by an annualized 2 percent during the last three months of 2006.

“Now I think it is 2.3 percent, with about half of that (increase) from energy prices,” Morici said.

He said the stimulative effect may become more evident soon.

“We should start to see some benefits from these oil prices in February,” Morici said



(c) 2007, Chicago Tribune.

Visit the Chicago Tribune on the Internet at http://www.chicagotribune.com/

Distributed by McClatchy-Tribune Information Services.

AP-NY-01-11-07 1833EST

Advertisement
SHARE