The New York Times
February 20, 2008
HOUSTON — Crude oil closed above $100 a barrel for the first time Tuesday, vaulting through a longstanding psychological barrier amid persistent concern about whether production can keep up with rising global demand.
The day’s price rise of more than 4 percent capped a week-long run-up that began when President Hugo Chávez of Venezuela threatened to cut off oil exports to the United States over a legal struggle with Exxon Mobil. Crude oil fell from a record $100.10 a barrel in New York on speculation that a U.S. Energy Department report will show stockpiles rose for a sixth week, according to Reuters. Crude oil for March delivery dropped as much as 90 cents, or 0.9 percent, to $99.11 a barrel in after-hours electronic trading on the New York Mercantile Exchange.
Just as Mr. Chávez appeared to back off from his threats, an explosion at a Texas refinery on Monday reminded traders and hedge fund managers of the gasoline shortages and price increases that accompanied similar refinery failures last year. Even though the Alon USA refinery at Big Spring, Tex., was relatively small and American inventories are considered adequate, traders and hedge funds took the explosion as a buying signal.
“With this credit crisis going on, everyone is on edge and the slightest disruption in crude oil or its products takes prices right up,” said Michael Rose, director of the energy trading desk at Angus Jackson in Fort Lauderdale, Fla. “Prices are going to go higher before they go lower.”
Energy experts cited numerous underlying causes for the rise in energy prices, which have persisted despite a weakening American economy. American demand for gasoline has slipped about 50,000 barrels a day (out of total daily consumption of more than 20 million barrels) so far this year because of the slowing economy, but consumption in China, in India and in the oil-producing countries themselves continues to rise. Traders are also concerned about possible production cuts by the Organization of the Petroleum Exporting Countries.
World supplies have been trimmed by substantial cutbacks in production in Iraq and Nigeria in recent weeks. Nigeria alone has lost about 10 percent of its daily production since guerrillas stepped up their sabotage and kidnapping of oil workers in the Niger Delta at the end of last year. Some analysts fear that OPEC could cut production further when it meets next month to counter the prospect that a softening world economy may eventually weaken demand and push prices down.
Prices for the benchmark grade of oil, West Texas Intermediate crude, rose $4.51 to close at $100.01 on the New York Mercantile Exchange. The price rose as high as $100.10 in trading during the day, at least the third time this year that oil prices crossed the $100 barrier during a trading day. While $100.01 is the first close above $100 a barrel and a record in nominal terms, it is still shy of the inflation-adjusted record of $103.35, set in April 1980. (That number will be recalculated on Wednesday when the government releases new inflation data.)
United States stock prices were dragged down by the record oil close, which helped to reverse a 157-point rally in the Dow Jones industrial average, because investors feared that higher energy costs would further weaken consumer spending.
The average national price for unleaded regular gasoline, according to AAA, the automobile club, and the Oil Price Information Service, stands at $3.03 a gallon, compared with $3.02 a month ago and $2.26 a year ago. It usually takes at least a week for increases in oil prices to be reflected in gasoline prices.
“We’re looking at retail prices for regular unleaded of $3.50 to $3.75 in April and May,” said Tom Kloza, an analyst with Oil Price Information Service. “Those will be records.” The record of $3.22 a gallon was set last May.
Mr. Kloza also predicted record highs for diesel and jet fuel “within the next 90 days.”
Analysts say another factor causing the rise in oil prices is the falling value of the dollar. A depreciating dollar depresses investment by oil companies in developing fields because their salaries and other costs go up in local currencies as their earnings from dollar-denominated oil go down. It also encourages continued global consumption by shielding foreign buyers, whose currencies have been rising in relation to the dollar, from the full effect of price increases.
The falling dollar, along with declining credit and stock markets, also encourages traders to seek a safe haven in oil and other commodities.
“The way the markets look right now, with the dollar being weak against all currencies,” Mr. Rose of Angus Jackson said, “it’s prudent for traders and people in other countries to buy dollar-denominated products like grains and energy.”
The immediate cause that sent prices up today was the fire at the Texas refinery, energy experts said. The run-up, they said, was mostly psychological, since domestic supplies are considered ample to satisfy demand for the next several months.
“It served as a reminder to the market that major refinery mishaps are not necessarily just a memory,” said Adam Robinson, an energy analyst at Lehman Brothers.
The blast at the West Texas refinery, which caused four injuries, will halt processing of about 70,000 barrels a day for probably several weeks at least. The refinery provides gasoline to Fina service stations in Texas and the Southwest. A second refinery in Hawaii suffered a disruption over the weekend, but production was quickly restored.
Oil refineries across the country were plagued last year by a variety of breakdowns, including fires, power failures and leaks, that trimmed production during the spring and summer driving seasons.
The mishaps occurred as refiners were trying to meet a variety of new environmental regulations, add ethanol to their fuel mix and introduce fuels lower in sulfur, a pollutant. Energy experts say the refiners have taken steps to improve their performance this year, but there may be more incidents in the coming weeks as refineries go through routine maintenance and switch from producing winter blends to spring blends.
“It’s kind of like starting up your lawn mower after it’s been inactive for a while,” Mr. Kloza said. “It’s a little tricky.”