Oil, Gasoline Futures Tumble; No Quick Retail Relief Seen
Prices of crude oil and gasoline tumbled on futures markets Tuesday on the news that President Clinton will release oil from federal reserves, but analysts warned motorists not to expect relief at the pump any time soon, at least not in California.
The state’s oil-refining capacity crunch, strong demand for crude in the Far East and other factors will keep the pressure on California gas prices throughout the summer, analysts predicted, although retail prices elsewhere in the nation will probably settle more quickly.
There was skepticism on the streets of Southern California as well. Monte Degree, a San Diego truck driver interviewed as he pumped $1.60-per-gallon gas at an Arco station, said he had heard something about Clinton’s action but wasn’t interested in the details.
“I don’t know about all that. I just want the prices to go down,” Degree said. “It’s hard on a person like me who doesn’t make a lot of money. All I want to know is when is it going to start working?”
Crude oil contracts for June delivery dropped by $1.23 a barrel to $21.20 and gasoline futures were down 4.62 cents a gallon to 72.39 cents on the New York Mercantile Exchange on Tuesday, the day after Clinton ordered the Energy Department to begin the sale of approximately 12 million barrels of oil from the nation’s Strategic Petroleum Reserve.
Clinton’s move was seen as largely political in an election year. The oil being released is less than a single day’s U.S consumption, which averages 18 million barrels.
“The cheaper oil is not going to hit the refinery right away, and in the past spot prices have not affected our costs as much as seasonal factors like supply and demand and travelers,” said Ed Abraham, manager of a Shell station in Coronado, south of San Diego.
But oil traders nevertheless may be convinced that the political pressure building on oil companies will ultimately cause prices to come down, said Drew Dickson, director of research at GSC Energy, an Atlanta-based futures brokerage and consulting firm.
“It had not so much a fundamental impact as a psychological impact. It just showed that in an election year, politicians are going to pay attention to the very touchy issue of gasoline prices, and that was enough to convince oil traders to give back some recent gains,” Dickson said. “However, the fundamental situation hasn’t really changed.”
From a little more than $18 a barrel in January, crude prices peaked at $24.50 two weeks ago--a surge the oil industry blames for much of the increase at the pumps. They have since fallen $3, and could drop $1 to $2 more in the next month, said Kevin Lindemer, senior director of Cambridge Energy Research Associates in Massachusetts.
But California motorists are unlikely to see any immediate benefit. Refining capacity in the state has declined in recent years because the business has been unprofitable and tightly regulated, making gasoline supplies inelastic and susceptible to demand spikes such as the current one, said Sal Ilacqua, an analyst with Rothschild Inc. of New York.
That has been worsened by recent accidents and problems at Shell and Arco refineries in the state, and glitches in start-up of production of the cleaner-burning gasoline required by the state as of June 1.
Global factors are also at play, but the Organization of Petroleum Exporting Countries has nothing to do with the current imbalance. Indeed, OPEC has been producing above its self-imposed quota, said Dickson of GSC Energy.
Ultimately, the amount of crude oil being produced around the world each day determines how much oil is available to refiners everywhere, while the world’s economies compete for it. And the quickly developing economies in Asian countries such as China and India have pushed global demand to levels that not even the excess OPEC production can meet, Dickson said.
A lot of Mideast crude that was once sold in Europe and North America is “now headed eastward,” Dickson said, and with declining U.S. production, U.S. consumers have become more and more reliant on imported oil.
“This has nothing to do with OPEC,” Dickson said. “This has more to do with demand-side fundamentals and how, over the course of the last several years, regulations have made it harder to keep refineries profitable.”
* ANTITRUST INQUIRY
U.S. opens probe of gas price hikes as political heat rises. A1
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Pumped Up
Retail gasoline prices in California have jumped about 40 cents a gallon since the beginning of the year. Weekly prices for self-serve regular unleaded in California:
Monday: $1.54
Source: Energy Information Administration
Researched by JENNIFER OLDHAM / Los Angeles Times
Oil (and Gasoline) Change
Both oil and gasoline futures prices dropped Tuesday on news that oil will be released from the federal Strategic Petroleum Reserve.
OIL FUTURES
Nearest term contract, dollars per barrel:
Tuesday: $21.20
GASOLINE FUTURES
Nearest term contract, cents per gallon:
Tuesday: 72.39 cents
Source: Bloomberg Business News
