Oil likely to rise further, may near $50 a barrel

Soaring world demand, fears of disruption, speculation drive prices

August 05, 2004|By Lorraine Mirabella | Lorraine Mirabella,SUN STAFF

Crude oil prices, driven steadily upward by soaring worldwide demand and concern about international supply disruptions, are expected to rise further and could hit near $50 a barrel, analysts say.

The price of crude oil for September delivery settled at $42.83 a barrel on the New York Mercantile Exchange yesterday after reaching $44.34 a barrel, the highest in the 21-year history of futures trading at the exchange. Oil futures have shot up 35 percent over prices a year ago.

The higher prices are already taking a toll on consumer spending and giving rise to worries about a slowdown in global economic growth.

"We have a very fragile system supplying us with petroleum," said James T. Bartis, a senior policy analyst at Rand Corp. in Washington.

One bright spot: Pump prices, which have fallen from their highs in recent weeks, are not expected to follow, because of adequate supplies of gasoline.

The oil market has reacted to terrorist attacks in Saudi Arabia, pipeline destruction in Iraq and financial troubles at Yukos, Russia's largest oil-producing company. At the same time, oil stocks remain well below historic averages in oil-using countries.

Demand is up not only in the United States but in Japan, with a recovering economy, and in China, with a growing appetite for consumer goods and automobiles. Consumption in China has risen by more than 1 million barrels a day in the past two years.

Though the $44 per barrel level represents a record high in dollar terms, it falls short of prices in 1990 leading up to the first Persian Gulf war, when prices, adjusted for inflation, soared to $57 per barrel.

Whether prices continue rising in the short term will depend upon what happens in Russia and Iraq, some analysts said.

"Anything that goes wrong - or even a perception that it is going wrong - is going to have a price impact" forcing prices to rise or to stay high," Bartis said.

Some analysts believe that prices could near $50 per barrel. "For now, crude oil prices are on a sustained up trend," said Marshall Steeves, an energy analyst at Refco Group Ltd., a New York brokerage.

"Whether it will continue to accelerate at the gains we've seen is another question. It will probably get into the high $40s and up closer to $50 before we see any sustained selling."

Much of the rise in the oil futures market has been driven by speculators who see "the action is not in the stock market, and are playing futures," said Michael Metz, chief investment strategist at Oppenheimer & Co. Inc. in New York.

"Demand is rising much more rapidly than supply," he said. "This is a factor that is tending to push prices up. Until they rise high enough to curb demand, and apparently that hasn't happened yet, then we'll see a drop in prices."

"To the person who works for Wal-Mart making under $20,000, it's a big hit to his pocketbook and has a big impact on demand for other things, whether you eat at a restaurant or stay home, whether you buy an extra pair of slacks."

The higher prices are contributing to dampened consumer spending on discretionary items, analysts said.

The Commerce Department reported Tuesday that personal spending fell 0.7 percent in June - the biggest drop since the Sept. 11, 2001, terrorist attacks. And last week the government's first measure of economic growth in the second quarter came in at 3 percent - a big slowdown from the 4.5 percent in the first quarter and below what economists had expected.

Consumer fuel expenses as a percentage of income rose by 1.6 percent in the second quarter, one economist said.

"That shows the pressure on discretionary purchases," said Lacy H. Hunt, chief economist at Hoisington Investment Management Co., a money management firm in Austin, Texas. "This is a material shock for the global economy. The record is four oil shocks in the past and we got four recessions. We're in the midst of another significant oil shock."

On the gasoline front, however, consumers got a bit of good news as the Energy Department reported inventory unexpectedly increased, signaling ample supplies for the remainder of summer.

The nation's store of gasoline rose 2.4 million barrels last week to 210.1 million barrels, the highest since February 2003, the department said.

The agency also reported that the average price of regular gasoline fell by 1.7 cents a gallon from the previous week, to $1.88 per gallon as of Monday - the eighth decline in the past 10 weeks.

The news sent gasoline prices tumbling, with the contract for September delivery falling 8.32 cents, to $1.2034 a gallon on the New York Mercantile Exchange, the lowest closing price since June 30. The 6.5 percent decline was the biggest one-day percentage decline since Sept. 2.

"The level of gas in inventory is in a normal range, which suggests the current prices are overvalued," Steeves said. "I don't think we'll see retail prices go up from here."

Bloomberg News contributed to this article.

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