Surprisingly, Oil Declines for 2nd Day

NY Times
July 9, 2008

By CLIFFORD KRAUSS

HOUSTON — Oil prices headed in an unusual direction — down — for the second consecutive day on Tuesday, leaving energy experts to wonder whether the drop is the beginning of a lasting trend or just a brief pause before another surge.

Oil settled at $136.04 a barrel, a drop of $5.33, or 3.8 percent. Analysts said the immediate causes included the strengthening of the dollar in recent days and the apparent veering northward of Bertha, the first hurricane of the 2008 hurricane season, meaning it was likely to miss the oil and natural gas facilities in the Gulf of Mexico.

They also noted that President Mahmoud Ahmadinejad of Iran had dismissed the possibility that war with the United States and Israel was imminent in remarks to reporters in Kuala Lumpur, relieving worries that Iran might try to block oil shipments in the Strait of Hormuz.

The decline bolstered a rally in the stock market, with the Dow Jones industrial average rising 152.25 points, or 1.36 percent, to 11,384.21. The broader Standard & Poor’s 500-stock index ended up 1.71 percent, at 1,273.70, and the Nasdaq composite climbed 2.28 percent, to 2,294.44.

But even as a barrel of oil lost more than 6 percent of its value since the Fourth of July weekend, energy analysts warned that it was too soon to predict an outright collapse in prices. Some predicted that this was just one more in a series of pauses that has accompanied the volatile rise in oil prices from $60 last summer and just below $100 at the beginning of the year.

Others were just left bewildered.

Chip Johnson, the president and chief executive of Carrizo Oil and Gas, a Houston-based company, said he was “confused” by “such wild swings.” But he added: “I can’t see oil getting cheap again ever. It’s just too hard to find, and too many people want to use it.”

Any sustained decline in oil prices could help the consumer at a time when higher food and energy prices have forced many to cut back spending on other goods. It could also help the ailing automotive and airline industries, lower the trade deficit and strengthen the dollar. Prices for gold, silver, copper and corn also dropped on Tuesday.

But the factors bringing down oil prices over the last two days could be short-lived. Traders have been using oil as a hedge against the dollar in recent years, and there is no assurance the dollar will strengthen for long if the economy further weakens. Another hurricane could develop at any time, and the strongest normally come in August and September. Tensions in the Middle East, Nigeria and other oil-producing areas can always erupt to put pressure on tight reserves.

“I don’t think there has been any change in the overall direction of the oil market,” said Addison Armstrong, director of market research at Tradition Energy, an energy broker that deals with banks and hedge funds. “The bias is still clearly to the upside, with $150 firmly in the sights of traders.”

Consumers have felt no immediate relief at the pump. The price of the average gallon of regular unleaded gasoline on Tuesday remained at nearly $4.11, the same as the day before, and about a dime more than a month ago and $1.14 more than a year ago.

The rise in gasoline prices has not matched the rise in crude oil prices in recent months, largely because Americans are driving less, buying fewer gas-guzzling vehicles and using more mass transit.

MasterCard reported on Tuesday that American drivers decreased their consumption of gasoline in the days leading up to and including the holiday weekend by nearly 4 percent from the year before. It was the 21st consecutive week of lower gasoline consumption in comparison with last year.

So far, however, the decline in American oil consumption is being offset by increasing consumption in China, India, Latin America and in oil-producing countries. The Energy Information Administration, a United States government agency, reported that world oil consumption rose during the first half of 2008 by 520,000 barrels a day compared with the first half of 2007, even though consumption in the United States and other industrialized countries declined by 760,000 barrels a day.

The agency further projected that the average price this year for West Texas Intermediate Crude, the common benchmark price, would be $127, up from the 2007 average of $72 a barrel. Its projection for 2009 is $133 a barrel, slightly less than the current price.

But some energy experts say the price could drop further. They say it is possible that the kind of “demand destruction” for oil that is taking place in the United States and Europe could spread to China, India and other countries that subsidize gasoline and other energy supplies.

Governments in China, India, Taiwan, Thailand, Indonesia and Malaysia have cut subsidies at least modestly in recent months because of strains on their budgets, and further subsidy cuts are considered likely, especially if oil prices continue to go up. Once their consumers see higher prices, they would be expected to cut their consumption.

“I see the pressure mounting on China big time,” said Fadel Gheit, an energy analyst at Oppenheimer & Company. Mr. Gheit said he could foresee oil prices going as high as $170 by the end of the summer before plummeting. “The faster oil prices go up, the more severe the correction is going to be,” he added.

China is thought to have stockpiled oil supplies in recent months to assure adequate reserves of diesel fuel and gasoline for the Olympics in August and avoid embarrassing shortages while the country is trying to impress the world.

Once the Olympics are over, some energy experts predict the Chinese will decide to cut subsidies further and try to control oil imports, easing demand on world supplies and helping to bring crude prices down.

“There is no reason oil could not drop below $100 a barrel again,” said Phil Flynn, an energy analyst at the Alaron Trading Corporation. “You could see a substantial sell-off.”

James Crandell, an energy analyst at Lehman Brothers, said he also sees oil prices easing in the coming months but he offered several caveats.

“Hurricanes are the biggest upside risk for prices this summer,” he said, adding that “a conflict arising between Israel and Iran that would disrupt supplies would have an equal if not greater impact.”