Oil prices plunge; gas prices won't - MANY TRADERS ARE NOW ANTICIPATING A QUICK WAR WITH IRAQ THAT WILL NOT DISRUPT OIL SUPPLIES

www.bayarea.com Posted on Wed, Mar. 19, 2003
By Michael Bazeley Mercury News

Californians who have been reeling from soaring gas prices got a dose of good news Tuesday as crude oil prices -- a key factor in what consumers pay at the pump -- plunged to their lowest level in two months.

That, along with an uptick in gasoline production by California refineries, could finally stabilize and even drive down gasoline prices, analysts said.

The April futures contract for crude oil plunged $3.26 a barrel Tuesday on the New York Mercantile Exchange, closing at $31.67 a barrel. Just a week ago it was trading at nearly $38, a 12-year high.

Today was the biggest drop in oil prices I've seen since I've been here,'' said Mark Mahoney, West Coast markets editor for the Oil Prices Information Service. Our traders haven't seen a day like this since 1991.''

Analysts and traders said President Bush's ultimatum Monday night to Saddam Hussein lifted a blanket of uncertainty that has destabilized the world oil market. Many investors are now anticipating a quick war with Iraq that will not disrupt oil supplies.

I think the traders are pretty confident that starting the war will improve the outlook for oil,'' said Severin Borenstein, director of the University of California Energy Institute in Berkeley. They apparently think this will lead to improved production compared to what they were otherwise expecting.''

Consumers will not see an immediate benefit at gas stations, however. Assuming the lower crude oil prices hold, it could take up to two months for gas prices to drop.

Refineries will need to sell off inventories built up at higher prices. And the cheaper crude oil will take weeks to be shipped and transported to U.S. refiners.

The United States consumes roughly 19.5 million barrels of crude oil a day, more than half of it imported.

In the Bay Area, gas prices have jumped 24 percent since January, from $1.72 a gallon to $2.14 a gallon, according to AAA of Northern California.

Price speculation

Whether prices will drop to last year's levels is not known.

Bay Area oil analyst Norm Higby, who tracks California gas prices, predicted consumers will be paying 40 to 50 cents a gallon less by August. Higby said oil companies have intentionally drawn down inventories to help drive up prices and that a post-war oil glut will force supply levels back up.

The demand will not be there and there will be additional supply,'' Higby said. All the refineries are going to have a glut of supply.''

But others predicted a gradual drop in gas prices, perhaps by just a few cents per gallon initially.

Unfortunately, when oil increases, gas prices skyrocket up, and when it decreases, they feather down,'' said Dennis DeCota, executive director for the California Service Station and Automotive Repair Association, which represents brand and independent gas stations. It will float down if crude continues to drop. . . . We're talking pennies.''

Volatile for months

A couple of factors keep upward pressure on California gas prices, Borenstein said. One is the cost of the ongoing switch from an MTBE fuel to ethanol. The other is a lack of refining capacity in the state, which is forcing California to import more expensive gas from other states.

We're hitting the boundaries of how much you can produce with limited refining capabilities,'' Borenstein said. There's no question a reduction in crude will help gas prices, but I don't think we'll see prices like we saw last year.''

Despite those issues, gasoline production in California increased 18 percent this week, according to the California Energy Commission. The spot market price for wholesale gas dropped a nickel over the weekend.

Traders said world oil prices probably will remain volatile in the coming months. U.S. supplies remain tight, and the Middle East situation is still unpredictable.

Commercial stockpiles of crude in the United States are at 269.8 million barrels, 18 percent below year-ago levels, according to the Energy Department. Supplies have dwindled as a result of high demand for heating oil in the Northeast and fewer imports from Venezuela.

Production surge

But traders are feeling more confident every day about oil supplies. Venezuela, whose oil industry was crippled by a nationwide strike, is now producing enough oil to make up for any Iraqi shortfall. And Saudi Arabia, the world's largest oil producer, reportedly has increased its production by 1 million barrels a day to more than 9 million barrels a day. The Saudis also have nearly 50 million barrels of oil in reserve, the New York Times reported, and could release it if global supplies are disrupted.

Fadel Gheit, senior oil analyst at Fahnestock & Co. in New York, said traders are coming to the conclusion that the world has enough oil to meet demand, even if Iraq's daily oil production is eliminated.

``The war premium is definitely off the oil market,'' Mahoney said.