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THE WALLSTREET JOURNAL: Weakening Demand? Oil Still Passes $100

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THE WALLSTREET JOURNAL: Weakening Demand? Oil Still Passes $100

By NEIL KING JR. and ANA CAMPOY
February 20, 2008; Page A3

Crude-oil prices finished slightly above $100 a barrel for the first time yesterday despite signs the world’s petroleum thirst may be subsiding.
 
The latest surge surprised many in the oil patch who have expected prices to head in the other direction as oil stockpiles increase and the U.S. experiences an economic slowdown, softening demand for energy. Higher prices put more pressure on the Organization of Petroleum Exporting Countries to keep supplies steady despite some calls within the cartel to cut output.

If prices linger at or above $100 a barrel, energy-intensive industries such as oil refiners and airlines could face higher costs, as could consumers. Oil’s rise helped reverse a stock-market rally yesterday.

Analysts and traders pointed to a slew of causes for the price surge, but put the main onus on the continued flow of speculative cash into the oil market and other commodities like coal and platinum. Political instability in Nigeria and Venezuela, tightness in the light-crude market and challenges in the refining sector also contributed.

“It’s a combination of lots of little things,” said Adam Sieminski, chief energy economist at Deutsche Bank, who contends the main driver is “the huge volumes of money moving into oil and other commodities.”

U.S. benchmark crude yesterday rose $4.51, or 4.7%, to settle at $100.01 a barrel on the New York Mercantile Exchange. Oil has touched or passed the $100 mark twice before but retreated before the end of the closing day. U.S. heating-oil and gasoline-blendstock futures also finished at nominal highs. On an inflation-adjusted basis, oil is only $3.09 below its record, set in April 1980.

Analysts said options trading helps explain the volatility. Banks sell clients such as hedge funds options to buy or sell oil at preset prices. Because banks make their own trades to cover their risks, moves can be accentuated. Big price swings in “each direction pull like a magnet,” said Adam Robinson, an analyst with Lehman Brothers Holdings Inc.

Also, the futures contract for March delivery expires today, reducing investor interest in the contract and making it easier for a few big trades to push up the market, he said.

The latest price surge, if it holds up, will make it tough for the big producers within OPEC to support an output cut when ministers meet March 5, as some within the group have urged. At a meeting earlier this month, OPEC ministers pointed to the weakening U.S. economy to warn of a possible oversupply of oil in the second quarter.

Since then, most key indicators have served to buttress OPEC’s argument. The Energy Department is forecasting a flattening of oil demand in the U.S. and a buildup in oil and gasoline stockpiles. Most big institutional forecasters, including the Energy Department and OPEC, now predict that demand growth will hover around 1% this year. Demand rose 1.4% last year from 2006.

Analysts still contend that increasing oil and gasoline stockpiles in coming weeks could spark a sharp retreat in prices. To keep supplies steady, they said, OPEC would optimally like to trim its output by around 600,000 barrels a day. Yesterday, the Energy Department’s Energy Information Administration reiterated its call for OPEC to increase production.

Some market speculators seem to be fixated on refinery snags, both actual and potential, analysts said. Last summer, a bout of unplanned outages drove gasoline prices to record levels. There are fears among investors of a repeat this year, said Stephen Schork, president of Schork Group Inc., a provider of oil- and gas-market research. “Concern and fear translate into greed, and speculators take [any news of refinery outages] and hype it into much higher prices,” he said.

Reformulated-gasoline blendstock futures yesterday on the New York Mercantile Exchange jumped 4.4% to $2.60 a gallon on news of a fire at a small Texas refinery on Monday. The refinery, owned by Alon USA Energy Inc., has the capacity to process 70,000 barrels of crude oil a day, a fraction of the total U.S. installed capacity of 17.4 million barrels of crude a day.

With many refineries in the midst of seasonal maintenance, not all of that capacity is being used. Still, refiners have been adding more gasoline supplies to storage tanks and pipelines. Since the beginning of the year, gasoline stocks rose by 16.1 million barrels, or 8%, to 229.2 million barrels, and are well above average for this time of year, according to data from the EIA.

Write to Neil King Jr. at [email protected] and Ana Campoy at [email protected]

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