$3.00 Gas?
Gas-pump sticker shocker
Retail prices expected to blow past record high
By Myra P. Saefong, CBS.MarketWatch.com
Last Update: 8:00 AM ET Feb. 14, 2004
SAN FRANCISCO (CBS.MW) -- Get ready to dig deeper into your pockets at the gas station this summer: $3 per gallon gasoline could be headed to a pump near you.
The expanding U.S. economy, limited supplies of certain blends and unexpected output cuts by major producing nations will likely propel U.S. retail prices well past their record high, industry experts said.
The Organization of Petroleum Exporting Countries, which supplies 40 percent of the world's oil, agreed Feb. 10 to rein in an estimated 1.5 million barrels of daily overproduction. Members also voted to cut their official output target by 1 million barrels to 23.5 million barrels a day, excluding production from Iraq, starting April 1.
The cartel's action comes as the national retail price of gas is only 10 cents below the all-time average high of $1.73 a gallon reached last August.
"OPEC's decision ... is one more reason on an already lengthy list of why U.S. consumers are likely to pay the highest gasoline prices on record this year," AAA spokesman Geoff Sundstrom said.
Gas prices "will certainly breach" the $2 mark on the back of OPEC's announcement, said Kevin Kerr, a senior trading director at KWEST Trading International. "At the same time, the economic recovery in the United States and other parts of the world ... and the draw on existing energy supplies could be disastrous."
Since the oil market didn't anticipate OPEC's dramatic moves, "the shockwave will be felt all the way to the pumps," Kerr said.
A survey of the five market analysts found all agree that retail gas prices will, at the very least, hit a new record this year.
Indeed, if crude inventories don't increase, and if OPEC votes to cut another 5 percent from its output, unleaded gas prices could reach the "upper limits of $2.75 to $3 this summer," said John Person, head financial analyst at Infinity Brokerage Services.
Dollar blame
One of the cartel's key reasons for the production cut -- a weaker U.S. dollar -- factors into expected price climb, thought the experts disagreed about its level of importance.
"Over and over again, OPEC raised crude oil prices ... saying the weaker dollar brings member nations lower revenues because oil is traded in dollars," Kerr said. "It isn't rocket science to figure out they will likely do this again with the dollar reaching new lows."
Fimat USA analyst John Kilduff sees a different driver. He said the dollar's decline coincides with a much bigger factor for oil prices: "The lowest U.S. crude-oil inventories in a generation."
Yet Tom Kloza, chief oil analyst at the Oil Price Information Service in Lakewood, N.J., believes the 2004 gasoline price rally won't be about crude, but about the level of gas supplies. "When traders fear a product may be 'short' as the season approaches, or when it actually is short or tight within [the] season, prices tend to migrate toward hyperbolic numbers."
Contributing factors
Retail prices will likely surpass $2 a gallon in two separate spikes," Kloza said, "one in the spring based on fear and uncertainty, and another toward the end of the summer."
The initial price jump will come during the transition from winter to summer blends of gasoline, which typically puts a strain on supply availability, Kloza said.
A variety of new state environmental regulations regarding gasoline formulation are having an increasingly disruptive impact on supplies, Fimat's Kilduff said.
"The mosaic formulation scheme that caused severe price spikes in California and the upper Midwest in the recent past is now coming to the New York Tri-State area, due to New York and Connecticut adopting ethanol as their oxygenation component, " he said. New Jersey has remained with the MTBE formulation, he added.
In addition, by July and August, the market might be experiencing average demand of 9.5 million barrels a day or higher at a time when production will likely top out at 8.8 million barrels or so, Kloza said.
With the economy gaining strength, this summer is "on pace to be a banner demand year," agreed Agbeli Ameko, a managing partner at energy-forecasting firm, Enercast Inc. "Supplies are lower and production is not keeping pace with this demand growth."
AAA's Sundstrom also noted that some travel experts expect robust spring and summer vacation seasons. That's a recipe for a peak-driving season where the supply and distribution system has no room for error, Kloza said.
"A refinery problem or two, an inordinate surge in demand, a loss of say, Venezuelan imports ... all this would create the much hackneyed 'perfect storm' characterization."
Paying the ultimate price
While Infinity's Person sees prices peaking at $3 in some metro areas in the worst of circumstances, OPIS' Kloza sees average prices rising above $2 but reaching the high-$2 range for only a brief period if at all. If any region sees prices near $3 a gallon, it would be already high-priced markets like California and Chicago and would occur only after a refinery outage or two, he said.
"The gasoline market will have an irregular heartbeat ... racing at times and resemble brachyadia at others," Kloza said. "The overall retail average for the year will be the highest ever," but there will a huge gap between the highest and lowest prices, which could still run as low as $1 a gallon in some states.
Fimat's Kilduff said it would be difficult for average prices to climb much higher than $2. "Some sort of government intervention would occur at levels around $2.25," he said, though he did accept the possibility of $3 gas in certain snag-prone areas, such as California.
Enercast's Ameko argued that federal and state politicians would likely intercede rather than sit idly by should prices skyrocket.
"Going into an election year, $3 retail prices would spell disaster," Ameko said. He doesn't expect demand to be strong enough to lift prices above $2.25, and suggested prices will average around $2.15. |
