REALITY CHECK: US OIL EXECS SEE PRICES BIASED ON UPSIDE
By Gary Rosenberger
NEW YORK (MktNews) - U.S. crude oil prices remain biased upward given the approach of winter, Asian economies swinging to positive growth and stringent OPEC production cutbacks, say industry officials.
But while it appears that the worst of the runup is over, they warn that more price spikes aren't out of the question in an industry where the unanticipated is generally the norm.
West Texas Intermediate has more than doubled since the December low of $10.73 a barrel -- briefly flirting with $25 territory early in October.
For the consumer, the most noticeable increases have been at the gas pumps, where prices are still mostly rising despite the end of the summer driving season.
"The most important factor has been OPEC and its ability to agree to cutbacks of production quotas and implement them," said John Lichtblau, chairman of Petroleum Industry Research Foundation.
"If OPEC absolutely sticks to its quota until their next meeting on March 22 in Caracas, prices would go higher," he added.
Last year's rock-bottom oil prices also forced production cutbacks in the U.S., where drillers have yet to respond to improved market conditions.
"U.S. oil drilling is still well below what it was a year ago," he said.
Exacerbating the production shortages are revived Asian economies that are increasing world consumption, Lichtblau said.
"The Asian economy has improved substantially," he said. "It is a significant recovery any time you move from negative to positive growth."
Lichtblau argues it wouldn't take much to raise oil consumption in the U.S. next winter, noting that even a "normal" winter would cause demand to rise relative to last winter, which was unusually warm.
"My assumption is that oil prices will hold in the mid-$20s range and that they could go somewhat higher," he said.
"Of course, if anything goes wrong, prices would go up," he said. "In this market, at the moment, there are very few extraneous events that push prices down."
One exceptions would be another unusually mild winter, he said.
Another one would be an early OPEC meeting prompted by concern that price levels are exceeding their targets and are setting the stage for price declines, he said.
Lichtblau worries about Nigerian unrest as a potential problem -- but he sees Iraq being out of the picture now that the U.N. has, for all practical purposes, lifted its ceiling.
He also noted that U.S. refineries have been running smoothly compared to the first quarter, when several accidents forced unanticipated and long shutdowns in the West Coast.
The industry, for the most part, does not anticipate oil to rise into the high $20s a barrel in the near future.
"If the price of oil swings wildly and stays up there for a few days for speculative reasons, OPEC will ignore it," he said. "But if it sticks, OPEC will decide to take action to bring supply more into balance with demand."
Chevron spokesman Fred Gorell said OPEC cutbacks have meant 2.1 million fewer barrels of oil a day against a world that consumes 75 million barrels a day.
"For a period a year ago, we had crude oil in the $10 to $11 range, now we're seeing a $25 range," he said.
Gorell posited that $10 was "too low for the marketplace under normal supply-demand and competitive factors."
"We're now at the opposite end of the scale," he said. "Would oil settle at $25 under normal market conditions? Probably not."
Gorell offered no forecasts about where the price of oil will settle, except to say, "the marketplace is a wonderful thing in that it's always trying to correct itself."
Gorell noted that market conditions are being exacerbated by a confluence of events, namely Asia's recovery coinciding with the reduction in global oil production.
"Before that we had the confluence of OPEC increasing production and declining demand because of Asia" -- which contributed to a global glut," he said.
"As things get healthier in Asia (and given the production cutbacks) we see the reverse effect squared," Gorell said.
Geoff Sundstrom, a AAA spokesman, noted that gasoline prices have mostly continued to move higher despite the end of the summer driving season.
In the past month, New York metro prices for unleaded gasoline were up about 6 cents a gallon to $1.42.
In Chicago prices moved up almost 5 cents a gallon to $1.39.
In San Franciso, prices are actually down about 6 cents a gallon, but motorists can expect to pay $1.60 a gallon.
In Los Angeles, the nation's biggest car market, prices are down almost 8 cents to about $1.40 a gallon.
Chevron's Gorell attributed California's contrarian price moves to a seasonal decrease in demand and the recovery of key refineries that were shut down because of accidents earlier this year. "California is a tight market that can swing up and down very quickly," he added.
On a nationwide basis, gasoline prices rose to $1.28.2 a gallon on Sept. 21 from $1.25.5 a gallon on Aug. 24, about a 2.7 cent increase -- but a huge leap from the historic low of 96 cents a gallon in February, Sundstrom said.
Sundstrom blamed the increases on OPEC production cutbacks -- and new government regulations aimed at cleaner fuel.
"The EPA has moved aggressively on two environmental regulations requiring changes in the content of gasoline," he said.
The effect of higher oil prices on the price of gasoline is obvious, he said.
But the EPA decisions to remove MTBE, suspected to be a cancer-causing agent, and to reduce sulfur may already be priced into the cost of gasoline, as both add up to "multibillion dollar" investments.
He said the EPA regulations have the support of the automotive industry, which sees car engines running smoother on the cleaner fuel.
Sundstrom suspects that the American consumer is in good shape financially to "absorb the price increases," but he worries about implications for the SUV market if high fuel prices persist.
High fuel prices already have implications for the cost of transportation, said Bob Costello, economist for the American Trucking Association.
"The price of diesel is up to $1.23 a gallon -- back in February it was 95 cents a gallon," he said.
"In between then and now, carriers have struggled to implement fuel surcharges," he said. "It's finally getting to the point where they are being implemented -- but the surcharges might only cover 50% to 60% of the additional cost of fuel."
Costello sees "no indication that the cost of diesel fuel will drop at all" this year.
"It should increase somewhat with winter coming," he said. "Our members are kind of scared -- they don't know what's going to happen."
Because diesel fuel and home heating oil are esenetially the same substance, "if it's a hard winter it could cause fuel prices to climb even higher," Costello said, adding that "it's already snowed in Minnesota and Iowa."
Higher fuel prices would have a deep impact on trucking because fuel is the industry's second biggest expenditure, second only to the cost of labor, which is also rising, he said.
"That can be a problem in an industry that runs on profit margins of 2% to 3%," Costello said.
"The increasing cost of fuel and labor is also a concern because the cost of transportation works out to about 10% of the cost of a finished good," he said.
Whatever the impact of OPEC's production cutbacks has been on the market, human psychological may have exaggerated the true danger, if industry statistics are any gauge.
The production cutbacks, while reducing inventories, have not reduced them below the range of normal, said Ron Planting, an economist for the American Petroleum Institute.
U.S. inventories are down to 305 million barrels from about 340 million barrels in May. But that compares with 310 million at this time last year, 304 million in 1997, 302 million in 1996 and 306 million in 1995, he said.
Even May's 340 million barrels was low compared to the 350 million barrels in inventory in May 1998 -- and was within the range of 305- to 330-million barrels in preceding Mays, he said.
"The current prices reflect people's expectations of what the future holds," Planting said.
The Labor Department is scheduled to release September PPI data on Friday at 8:30 a.m. EDT. August PPI was up 0.5% after a 0.2% rise in July.
The Labor Department is scheduled to release September CPI data the following Tuesday at 8:30 a.m. EDT. August CPI rose 0.3% after a like rise in July.
Editor's Note: Reality Check stories survey sentiment among business people and their trade associations. They are intended to complement and anticipate economic data and to provide a sounding into specific sectors of the U.S. economy. |
