Observers say fuel prices may dip with energy market sell-off


Even as gasoline prices in Las Vegas inch toward $3 a gallon, motorists needn't fret about how much higher fuel costs will go, analysts said Thursday.

A gallon of unleaded gasoline cost $2.95 on Thursday, up 8 cents from a month ago, according to numbers from travel club AAA. Statewide, gasoline already costs $3 a gallon. But the recent increase has been much smaller than in previous years. Prices rose 20 cents in one month in May 2009, and 24 cents over roughly the same period in 2008.

Fuel prices have jumped this spring for all the usual reasons, including routine refinery-maintenance shutdowns and a small seasonal uptick in road travel.

This year's price gain stayed small partly because unemployment remains high, at nearly 10 percent nationally and more than 13 percent in Nevada. Consumers also remain leery of unnecessary spending, said Michael Geeser, a spokesman for AAA Nevada.

But gasoline prices probably won't go much higher in the summer, most energy analysts agreed, and fuel expenses could actually fall noticeably in coming weeks and months.

"Whatever prices you've seen through Cinco de Mayo, and maybe through Friday, will be the highest prices you're likely to see through the summer at least," said Tom Kloza, chief oil analyst with the Oil Price Information Service in Wall, N.J. "There's a much better chance you'll be paying $2.75 by Memorial Day than $3.25."

Here's why price relief could be on the way: Start with a massive sell-off in financial and energy markets thanks to mass civil unrest in Greece, which is floundering amid efforts to cut public employees' pay and reform its taxation system. As investors have sold their oil stakes, the price of crude has plunged, going from $86.19 on Monday to $77.11 on Thursday. Oil prices affect gasoline prices because crude makes up more than half a gallon of gasoline.

"I think the recent sell-off shows you how fragile the price of oil is," said Phil Flynn, an energy researcher with Chicago futures brokerage PFGBest. "The price has been propped up by economic stimulus and a lot of other outside forces. It hasn't been about supply and demand."

What's more, sell-off-forcing economic turmoil isn't just for Greece these days. Several other European countries could soon join Greece in seeking fiscal bailouts. The potential financial contagion has pushed down the value of the euro and strengthened the value of the U.S. dollar, which investors now consider a relatively safe haven, Flynn said. Traders sell crude globally in U.S. dollars, so a stronger dollar means buyers need fewer dollars to purchase a barrel of petroleum. For example, if oil is selling for $40 a barrel, and the value of the dollar drops by half, then you'll need $80 to buy the crude. If the value of the dollar doubles, you'll need just $20 to buy a barrel.

The United States also has big supplies of oil and gas, and that should help keep a lid on prices. Flynn pointed to figures from the U.S. Energy Information Administration showing that the country's petroleum inventories jumped last week by 2.8 million barrels, pushing oil supplies to 360.6 million barrels (the country goes through roughly 20 million barrels of oil a day). That supply is 5.4 percent above five-year averages. Gasoline stockpiles now exceed five-year averages by 7.6 percent.

And China, where economic growth seemed virtually unstoppable early in the global recession, looks to be slumping.

China "is showing signs of exhaustion," Flynn said, with "surprisingly slow" manufacturing-sector expansion in April. If the slowdown continues, expect lower demand for oil from China, and that would mean it's possible that oil "has a much farther way to fall," Flynn said.

One thing that's not affecting oil and fuel prices so far? That massive crude spill in the Gulf of Mexico.

Investors have shrugged off the spill partly because the oil well involved in the accident was an exploratory well, so the market hadn't yet built it into supply forecasts, Flynn said.

Kloza added that the amount of crude pouring into the gulf is a "drop in the bucket" as far as global oil supplies. The slick could yet affect fuel prices if it slips closer to shore, because ships that import oil and gasoline from around the world through ports along the Gulf Coast could face delivery delays if they need their hulls cleaned.

For now, Kloza said per-barrel oil prices in the $60s or $70s would be "fairly reasonable."

So consumers should expect relief at the pump this summer, with gasoline prices falling toward $2.50 to $2.75 nationally, Kloza predicted.

Flynn agreed that gasoline prices don't likely have much more upside left. Gasoline futures have plummeted as much as 27 cents a gallon in the last week; if advance prices stay that low, consumers will see a "dramatic drop at the pump very soon," he said.

But Bob van der Valk, fuel-pricing analyst for Lynnwood, Wash.-based fuel-management company 4Refuel, sees price increases coming.

Oil refiners get less fuel out of a barrel of crude in the summer because federal regulations require a different gasoline makeup to limit auto-related carbon emissions. The modification forces a 10 percent drop in gasoline output in the warm months, van der Valk said, and that smaller production will happen as vacationing consumers hit the roads en masse in the summer and boost fuel demand.

Van der Valk predicted $3.25 for a gallon of gasoline in Las Vegas by the end of August, though prices should slip back under $3 by Thanksgiving and around $2.50 by Christmas.

AAA Nevada's Geeser said he doesn't expect fuel prices to affect consumers' summer travel plans, though he noted unexpected events such as an active summertime hurricane season, dramatic improvements in the economy or heightened diplomatic tensions in the Middle East could cause a few surprises.

"But with the economy the way it is and demand relatively low, we don't expect gasoline prices to break any records this summer," he said.

Contact reporter Jennifer Robison at jrobison@reviewjournal.com or 702-380-4512.

PAYING UP TO FILL UP

Fuel prices have risen in recent weeks, though costs remain well off their record levels.

Region Thursday April 6 May 6, 2009 Record
Las Vegas $2.95 $2.87 $2.18 $4.28 (June 21, 2008)
Nevada $3.00 $2.93 $2.20 $4.27 (June 20, 2008)
Nation $2.93 $2.83 $2.11 $4.11 (July 17, 2008)
Source: AAA
 

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