Prices Drop as Oil Reserves Continue Rise

Prices for crude oil and gasoline on U.S. commodities markets initially were lifted Wednesday by Russia’s announcement, but ultimately both closed lower on the day. And analysts said they don’t foresee Russia’s action causing a significant jump in prices over the next couple of months.

That’s because U.S. stockpiles of oil and gasoline continue to bulge, according to government and industry statistics released this week.

The economic recession, together with the slump in travel after Sept. 11, have left the country awash in fuel and are keeping downward pressure on prices.

Self-serve regular gasoline now sells for 99 cents a gallon at some Southern California service stations, down from about $1.50 a gallon at this time last year.

Pump prices for regular gasoline throughout California now average $1.24 a gallon--the lowest price in 21/2 years.

“For the consumer, this is obviously the silver lining in a sluggish economy,” said David Pursell, a vice president at Simmons & Co., a Houston investment bank that focuses on energy.

To be sure, stock market investors and some economists see the U.S. economy beginning to regain momentum, and OPEC has been waiting for cuts by Russia and other non-OPEC producers to again pare its own output.

Both factors could put upward pressure on prices.

But many analysts and energy traders are skeptical that Russia will follow through on its reductions, or that OPEC’s members also will abide by any further cuts in their production quotas.

And it could be months before the U.S. economy shows evidence of a rebound, they said.

In the meantime, the drop in airline travel since Sept. 11--which has sent jet-fuel prices plummeting--is adding to the growing inventories of gasoline, Pursell said.

Oil refiners, seeing a shrinking market for jet fuel, are instead taking their oil “and converting it into distillate fuel, mostly heating oil and motor gasoline,” he said.

Gasoline for January delivery on the New York Mercantile Exchange fell 0.83 cent to 54.20 cents a gallon Wednesday. Crude oil for January delivery dropped 16 cents, to $19.49 per 42-gallon barrel, on the Nymex.

Domestic inventories of gasoline rose another 1% last week to 210.6 million barrels, and that’s an increase of 7.1% from a year earlier, according to the industry’s trade group, the American Petroleum Institute. Crude-oil stocks, meanwhile, also rose in the latest week to 310.3 million barrels, up 7.9% from a year ago. All of which has sent retail gasoline prices on a startling decline, capping a topsy-turvy year in the fuel market.

Early this year, as OPEC began cutting production and gasoline inventories were low, pump prices surged above $2 a gallon in California and elsewhere, and some speculated they might even reach $3 a gallon. Instead, refiners stepped up production, fuel supplies grew and prices fell.

In the week ended Monday, the average price for self-serve regular in Los Angeles was $1.101 a gallon, down a whopping 52 cents from a year earlier, according to the Energy Department’s Energy Information Administration.

The average price for all of California was $1.243 a gallon, down 48 cents from a year ago and the lowest since the week ended March 22, 1999.

Factoring in inflation further points up gasoline’s cheap price these days. Consider: In 1980 the average U.S. pump price was $1.25 a gallon.

Based on the gains in the consumer price index since then, gasoline should now cost more than $2 a gallon, according to the Labor Department’s inflation calculator.

Instead, the average U.S. price per gallon is about $1.11 today.