Oil Prices Near $104 a Barrel as
Dollar Falls to Historic Low Against Euro
JAD MOUAWAD / International Herald Tribune 4mar2008
Monday, March 3, 2008 NEW YORK — The price of oil rose Monday to nearly $104 a barrel after the dollar fell to a historic low against the euro, setting a record and exceeding the inflation-adjusted high reached in the early 1980s during the second oil shock.
Oil futures touched $103.95 on the New York Mercantile Exchange, topping the record set in April 1980 of $39.50 a barrel, a level that would translate to $103.76 a barrel at current values.
Oil prices are surging as investors seek refuge in commodities to offset a slowing U.S. economy and declines in the dollar.
Financial institutions, like pension funds and hedge funds, are also investing heavily in oil and other commodities as a hedge against a rise in inflation, analysts said.
That trend is expected to continue, especially after Ben Bernanke, the chairman of the Federal Reserve, signaled last week that he was ready to cut interest rates further to bolster growth despite rising consumer prices.
"When investors lose confidence in the central bank, they tend to look for hard assets," Philip Verleger, an independent economist and oil expert, said. "The Fed's capitulation on inflation is driving investors to commodities. The problem is there are no sellers. This means futures prices will keep rising."
The California Public Employees' Retirement System, or Calpers, the largest U.S. pension fund, said last week that it might increase its commodities investments sixteenfold to $7.2 billion through 2010 to tap into an across-the-board surge in commodities like gold, silver, oil and wheat.
The immediate catalyst for the spike in energy prices is the drop in the value of the dollar. Currency traders are selling dollars and buying euros to take advantage of the difference in interest rates between the United States and Europe.
The dollar weakened, continuing its steep decline of last week, and the euro rose to a record $1.5274 in early New York trading. The dollar also fell to its lowest level in three years versus the yen.
"The question for oil is where is the dollar going," said Roger Diwan, a managing director at PFC Energy, a consulting firm in Washington. "That's going to be the main market mover in the short term."
Since 2000, oil prices have more than quadrupled as strong growth in demand from the United States and Asia outstripped the ability of oil producers to increase their output.
The rising prices of the past decade failed to dent global economic growth as consumers absorbed the higher costs thanks to easy credit and rising prosperity in the United States. In developing countries, government subsidies helped ease the pain. The rise in prices was a result of expanding wealth globally.
The trend has not slowed down much even with the United States economy at a near standstill. Global oil consumption is still expected to increase by 1.4 million barrels a day this year, driven by demand in China and the Middle East.
Still, the surge in oil prices is markedly different from the energy crises of the 1970s and 1980s. Those were brought about by sudden interruptions in oil supplies, like the in 1973 Arab oil embargo, the Iranian revolution of 1979, or the outbreak of the war between Iran and Iraq in 1980.
At the time, the global economy was much more dependent on oil as a source of energy than it is today. In the early 1980s, energy accounted for about 8 percent of disposable income in American households.
As the economy became less energy-intensive, and prices declined, that share fell under 4 percent in the early 1990s.
But in recent years, analysts have pointed out that the share of energy spending has been increasing. It reached more than 6 percent of disposable income in December.
Other energy futures also rallied on Monday. Gasoline and heating oil futures both jumped to new records. Natural gas prices, which are up 27 percent since the beginning of the year, rose 2 percent to $9.566 per 1,000 cubic feet, or 28 cubic meters.
In London, Brent crude futures rose $2.07 to $102.17 a barrel.
Gold also reached a record after several days of large gains, approaching $1,000 an ounce on Monday.
Most experts believe that the price of oil is not about to drop any time soon.
The Saudi Arabian oil minister, Ali Al-Naimi, said crude prices were unlikely to fall below $60 a barrel because the cost of developing alternative fuels, like tar sands, is rising. "Therefore, a line has been drawn below which the price cannot fall," Naimi said during an interview which was published over the weekend by Petrostrategies, a Paris-based industry newsletter.
Naimi's comments came as the Organization of Petroleum Exporting Countries prepared to meet Wednesday. Analysts expect the oil cartel to leave production levels unchanged.
The oil producing group had suggested last month that it might curb production soon to make up for a seasonal decline in oil demand. But with oil prices at their current levels, analysts said OPEC members would find it politically difficult to curb their output at this time.
Some analysts expect oil producers to trim their production informally to avert an oil surplus in coming weeks. Others said OPEC is being pulled apart by contradictory pressures.
"The market around the fringes is starting to fray," said Lawrence Goldstein, an economist at the Energy Policy Research Foundation. "Yet ironically you are looking at triple-digit oil prices because the price is being set by nonphysical investors."
U.S. manufacturing slumps U.S. manufacturing slumped to its weakest in nearly five years in February, reinforcing worries the world's largest economy is headed for recession, while a fall in U.S. construction spending in January added to the gloom, Reuters reported.
The Institute for Supply Management said on Monday that its index of national factory activity fell to 48.3 in February from 50.7 in January. It was the weakest reading since April 2003, the month after the start of the Iraq war, and was also below the level of 50 that separates growth from contraction.
U.S. construction spending fell a sharper-than-expected 1.7 percent in January, led by a fall-off in private home building, government data showed in a report that marked a continued decline in the housing market.
Together, the reports are likely to heighten fears the U.S. economy is bound for a recession, if it has not already fallen into one.
"The ISM manufacturing index is now in the no-man's land between weak growth and recession, but the problems elsewhere in the economy point more to the latter," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
According to another report, help-wanted postings on major U.S.-based Internet job boards rose 16.8 percent in February, showing an expected post-holiday seasonal rise.
The Conference Board said its measure of the total number of unduplicated online jobs rose to nearly 3.93 million in February from about 3.36 million in January.
U.S. Retail Gasoline Price Nears Record: Government
TOM DOGGET & DAVID GREGORIO / Reuters 4mar2008
WASHINGTON — U.S. retail gasoline prices rose closer to record levels last week, up 3.2 cents from the previous week due to higher crude oil costs, the government said on Monday.
The national price for regular unleaded gasoline averaged $3.16, up 66 cents from a year ago and about a nickel away from the record $3.22 reached last May, the Energy Information Administration said in its weekly survey of service stations.
Separately, the price truckers paid for diesel fuel set a record for the second week in a row, jumping 10.6 cents to $3.66 a gallon, up $1.03 from a year ago, the EIA said.
Higher crude oil prices, which hit a record of almost $104 a barrel on Monday at the New York Mercantile Exchange, have driven motor fuel costs higher despite declining fuel demand and the highest U.S. gasoline inventories in 14 years.
The price of crude accounts for about two-thirds of the cost for making gasoline.
The EIA said its next monthly energy forecast on March 11 will revise up its prior estimate that gasoline will peak at $3.40 a gallon this spring.
In the EIA's latest weekly survey, gasoline was the most expensive on the West Coast at $3.39 a gallon, up 12.1 cents. San Francisco had the highest city price at $3.53, up 9.5 cents.
The Midwest states had the cheapest regional price at $3.08 a gallon, unchanged from last week. Denver had the most affordable city gasoline at $3.03 a gallon, up 1.8 cents.
The EIA also reported gasoline prices were up 15.6 cents at $3.43 in Los Angeles, 12.5 cents at $3.41 in Seattle, up half a penny at $3.30 in Miami, down 1.2 cents at $3.16 in Chicago, up 1.9 cents at $3.13 in New York City, up 0.9 cent at $3.05 in Boston and up 1.8 cents at $3.04 in Houston.
The central Atlantic states had the most expensive diesel fuel at $3.83 a gallon, up 13.2 cents. The Rocky Mountain states had the most affordable diesel at $3.57, up 10 cents.
Oil Falls on OPEC Worries,
NEW YORK — Oil futures fell sharply Tuesday, dropping below $100 on the possibility that OPEC will boost production and on expectations that crude inventories are continuing to rise.
Light, sweet crude for April delivery fell $3.02 to $99.43 on the New York Mercantile Exchange.
Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said the cartel is shying away from boosting production due to expectations that global demand for crude will fall during the second quarter. But some investors are betting the cartel will boost production to bring prices down.
OPEC ministers are worried that soaring oil prices will help push the U.S. into a recession, which would further cut demand for crude.
"Whether enshrined in a formal quota hike or more surreptitious, an OPEC output hike seems a distinctly stronger possibility that the market has apparently priced in," said Antoine Halff, an analyst at Newedge USA LLC in a research note.
Prices were also pressured by expectations that domestic crude inventories rose by 2.3 million barrels last week, according to analysts surveyed by Dow Jones Newswires. The Energy Department's Energy Information Administration will issue its weekly inventory report on Wednesday.
Prices rose as high as $103.95 a barrel Monday, climbing past the $103.76 price many analysts consider to be the true record high for oil after the $38 per barrel price from 1980 is adjusted for inflation.
Analysts attribute much of the recent run-up in oil prices to speculative investors driven to the market by the falling dollar. Crude futures offer a hedge against a falling dollar, and oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling. This view of oil futures as a safe haven for money during turbulent times has in many cases rendered reports on inventories and demand moot.
OPEC Unlikely to Raise Output
VIENNA, Austria — OPEC has virtually ruled out pumping more oil to ease record-high prices, key oil ministers signaled Tuesday on the eve of a cartel meeting.
Chakib Khelil, president of the Organization of Petroleum Exporting Countries, said the 13-nation group is shying away from boosting production because of the U.S. economic slowdown, political turmoil in the Middle East and expectations of slackening global demand for crude.
On Monday, oil surpassed the all-time record of $103.76 a barrel when adjusted for inflation. The previous record was $38, set in 1980 at the height of the U.S.-Iran hostage crisis.
Investors, sensing that oil production would remain unchanged, pushed oil lower Tuesday.
Light, sweet crude for April delivery fell $3.02 to $99.43 on the New York Mercantile Exchange.
"Because of the economic slowdown in the United States — which is affecting world economic growth and world demand on oil this year — I don't think OPEC will consider increasing its production," Khelil told reporters. "Stocks are very high ... and we are going to have less demand in the second part of the year."
Pressure has mounted on OPEC to raise output, which could help pull down prices which have hovered above $100 for weeks.
Reaction was muted in the United States, where the average price for a gallon of gasoline has reached $3.16.
"Oil-producing countries should work to keep the markets well supplied. And right now we have extremely high demand and tight supply," White House press secretary Dana Perino said.
Since demand typically eases in the second quarter, however, OPEC was widely expected to take no action at Wednesday's meeting in Vienna.
"Politically, OPEC should increase output. But I think what they will actually do is nothing," said John Hall, of John Hall Associates in London.
Hall said one option would be to authorize Khelil to order an output increase or decrease in the coming weeks — a gesture that would reassure jittery oil markets. OPEC's advisory committee, which makes recommendations to the entire cartel, planned to meet Tuesday afternoon.
Khelil held open the possibility of some kind of intervention Tuesday. He spoke after talks with Oil Minister Ali Naimi of Saudi Arabia, OPEC's top producing nation and its most influential member.
Kuwait and Libya are among OPEC members who have said the cartel should maintain its current output, estimated at about 29.7 million barrels a day — roughly 40 percent of daily world demand.
Qatar's oil minister, Abdullah bin Hamad Al Attiyah, said the cartel was inclined to hold steady — if only because the markets don't seem thirsty for more oil.
"We know our customers very well," he said. "We ask them very simple questions, like, 'Do you need more oil?' The answer is 'no."'
However, Iran and Venezuela — both hawkish on prices — have pressed for a cut in output. Analysts said it was doubtful that the rest of OPEC would go along.
"A cut would have to be a consensus," said Rafel Ramirez, Venezuela's oil minister, contending any increase "would make no sense."
"Global markets are well supplied," Iranian Oil Minister Gholam Hussein Nozari said Tuesday, saying the weak U.S. currency is a greater concern.
Ramirez sees $90 a barrel as the long-term floor and suggested OPEC is determined not to allow prices to dip below level.
Yet the pricing trend has been up, not down.
Oil shot up 19 percent in February as tensions in the Middle East increased. Also supporting prices was a Turkish incursion into Iraq and the weak dollar.
Reducing output now "would remove a bullet from their arsenal which could be used more effectively at a latter stage if prices begin to fall," said Johannes Benigni, managing director of JBC Energy in Vienna.
"There's been a lot of suggestion about a cut, but I don't think we would support that based on what's happening with prices," said Nigeria's energy minister, Odein Ajumogobia.
The 13 OPEC members are Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. Iraq is the only member not subject to the cartel's output quotas.