A bump, then gas prices could fall

Analysts doubt rising cost of crude will affect pump

By Craig D. Rose, Staff Writer
San Diego Union-Tribune September 15, 2007

Local gasoline prices continue to increase, with some experts predicting they'll rise another nickel or so before leveling off.

The average price for unleaded regular in San Diego County yesterday was $2.92 per gallon, up 7 cents from last week and 13 cents from two weeks ago, according to the Utility Consumers' Action Network.

A month ago, by comparison, the average price was $2.88, while at this time last year the price hovered around $3.00.

Nationally, average gas prices fell about 1 cent overnight to $2.80 a gallon, according to AAA and the Oil Price Information Service.

Analysts doubt the recent surge in crude oil prices - which topped $80 a barrel this week - will push gasoline to $3 a gallon nationally, although in California the price could go slightly beyond that.

Yesterday, light, sweet crude for October delivery fell 99 cents to settle at $79.10 a barrel on the New York Mercantile Exchange after rising earlier to $80.36, a new intraday record.

Oil industry analyst Tom Kloza expects little more increase in gasoline prices unless a major storm hits refineries along the Gulf Coast.

He and others note that gasoline demand is ebbing and should continue to decline into the fall. Beginning today, refiners can begin selling winter-grade gasoline, which is cheaper and easier to produce.

"Without storms, we might see another 5 to 10 cents per gallon of upside at the most," Kloza predicted.

That may come sooner rather than later.

Dave Whitlow, who owns Spirit Auto in Lakeside, said his suppliers were warning that wholesale prices could rise another 3 to 4 cents by today.

"I think prices will go back down," said Whitlow, who has been in the business for 15 years. "This is the time of the year when demand goes down."

Kloza, however, said conventional demand for petroleum products has less to do with pricing than it once did. A growing factor in pricing is the huge volume of speculative investment that courses through petroleum markets, he said.

Kloza noted, for example, that the United States produces 200,000 barrels of West Texas Intermediate crude daily. But financial markets traded more than 600 million barrels of the benchmark product on a single day this week.

"The value of oil is an abstraction - the numbers are tied to investment flow, cyclical tides and fear," Kloza wrote this week.

In trading yesterday, oil futures fell for the first time in 10 sessions after a rally that has driven prices to new highs that some analysts say are unrealistic.

Futures were buffeted all day as some traders sold to lock in profits and others bought on worries about a tropical storm.

Gasoline futures also fell as power was restored to some of the refineries shut down after Hurricane Humberto hit Port Arthur, Texas, on Thursday. But natural gas rallied as Tropical Storm Ingrid strengthened in the Atlantic.

Oil's rapid rise from $69 a barrel less than a month ago has been propelled by falling domestic oil inventories, concerns about growing demand and speculative buying by large investment funds, analysts say. But several are now sounding alarms, arguing that there are no fundamental reasons supporting oil's rally.

In recent days, OPEC has said it will boost output, which should alleviate some of the supply concerns, and the International Energy Agency has cut its global demand forecasts. Oil inventories are falling in the United States, but they still remain at record levels. And gasoline demand has ebbed with the end of the summer driving season.

"The combination of comfortable inventories in the upstream crude oil market and weak product demand growth at the far downstream end of the petroleum complex suggests overall price weakness, not strength," wrote Tim Evans, an analyst at Citigroup Inc., in a research note.

Yet crude has breached the once-elusive $80 mark three times in the past three days, closing above that psychologically important level on Thursday for the first time ever before falling yesterday.

"Going into the weekend, people want to take their money off the table," said Stephen Schork, an analyst and energy trader who publishes the daily Schork Report in Villanova, Pa. "I don't think anyone's a believer in $80 oil."