Wall St. Tolerates Rising Crude Oil Prices--for Now

The price of oil has jumped nearly $5 a barrel since Jan. 1, a move that in years past might have panicked stock and bond investors and caused inflation sirens to blare.

This time, Wall Street can barely stifle a yawn. Not only do economists almost universally doubt that oil can sustain these gains, but most of the oil traders who are paying current prices also doubt that they’ll be doing so for much longer. Stock and bond investors can only hope that that’s the case.

The disbelief about oil is apparent from prices of oil futures on the New York Mercantile Exchange. On Tuesday, the contract for April delivery leaped $1.07 to $24.34 a barrel, highest since January, 1991, the start of the Persian Gulf War.

But the April contract, which expires today, only indicates the “spot” price of oil, meaning the price that desperate buyers must pay to immediately get their arms around a barrel of crude. If a buyer can wait until May for delivery, the price drops to $20.83; wait till September and the price is just $18.05--or $1.50 less than the cost on Jan. 1.

In the futures trading pits this pricing structure is known as “backwardation.” Normal people might just call it a game of chicken.

*

Since the start of the year the oil market has been operating under the assumption that Iraqi oil, which has been kept off the world market since the Gulf War, will soon begin to flow again. Iraq and the United Nations have been negotiating a deal to allow Iraq to trade oil for food and medicine.

Iraq would produce about 700,000 barrels a day under the proposed deal, says John Lichtblau at the Petroleum Industry Research Foundation in New York. Although that’s only 1% of total daily world production, traders assume it would be enough of a sudden increase in supply to keep prices subdued, if no other producers cut back.

Hence, U.S. oil refiners have been reluctant to build up inventories, figuring that prices will fall. Yet at the same time, the miserably cold winter in much of the United States and Europe has caused heating oil consumption to soar, causing inventories to decline much more than expected.

Now, with the summer driving season looming, U.S. crude oil inventories total 299.7 million barrels, near the lowest level since the late-1970s. Yet there is still no deal with Iraqi leader Saddam Hussein. U.N. Secretary General Boutros Boutros-Ghali said Tuesday that “many problems” remain in negotiations, which will resume on April 8.

The lack of Iraqi oil hardly constitutes a crisis for the world market--there is, in fact, plenty of oil out there. Just not enough at this moment to meet demand from nervous traders and refiners that have waited too long to fill orders. So short-term oil prices are spiking.

But from Wall Street’s point of view, rising oil prices present no sustainable inflation threat. “The worst that happens is that prices level off here, and then go down when Iraqi oil comes on line,” says a confident Gordon Richards, economist at the National Assn. of Manufacturers in Washington.

Even so, prices have been creeping up at the gas pump. The average retail price per gallon for regular unleaded self-service gasoline in Los Angeles hit $1.215 last week, up from $1.189 on Feb. 19, according to Computer Petroleum Corp.

The big question now is how significantly crude prices, and gasoline prices, can decline in coming months, even if Iraq and the U.N. strike a deal. Although many refiners today may be used to keeping lower inventories--just like most manufacturers--there is expected to be some rebuilding of U.S. stockpiles that should partially offset any downward price pressure caused by Iraq.

Also, strong natural gas prices should provide support for oil prices, analysts say.

Finally, oil demand worldwide has been more robust than expected this year, especially in the developing world. With inventories low and short-term prices high, that leaves the global economy particularly vulnerable to any sudden shut-off of oil caused by a natural or man-made disaster.

But Wall Street can’t plan for those nightmares, so it ignores them. What about oil-company stocks? They’ve been hot this year, but some analysts are antsy. “I don’t think the [recent] stock price moves are going to be justified by” the companies’ earnings if oil retreats soon, warns Alvin Silber, analyst at Herzog Heine in New York. Nonetheless, he allows, “Saddam will determine what the stocks do in the short run.”

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Short-Term Spike?

The price of oil on the “spot” market--that is, for immediate delivery--hit a four-year high on Tuesday. But oil contracts for delivery later this year are far below current levels. Tuesday closing prices for 1996 oil futures, per barrel:

April: $24.34

May: $20.83

June: $19.58

July: $18.77

Aug.: $18.34

Sept.: $18.05

Oct.: $17.85

Nov.: $17.68

Dec.: $17.54

Source: New York Mercantile Exchange