Crude prices fall as supply threats ease and signs of U.S. economic weakness emerge

Tuesday, September 19th 2006, 3:09 pm
By: News On 6

WASHINGTON (AP) _ The likelihood of finding $2-a-gallon gasoline in some parts of the U.S. is increasing by the day.

The nationwide average at the pump is already below $2.50, and with a huge decline in oil and gasoline futures on Tuesday analysts say the outlook for motorists is only getting better.

``We'll see sub-$2.25 a gallon retail (prices) by October,'' said Tom Kloza, director of the Oil Price Information Service, adding that prices below $2 can already be found in Kansas, Missouri, South Carolina and other states.

Oil prices sank by more than $2 a barrel Tuesday to settle near a six-month-low as worries about supply threats eased and signs of economic weakness in the U.S. signaled a potential cooling of energy demand.

The selloff brought crude oil futures to a six-month low, and helped weigh down already sinking gasoline prices.

``The real-time fundamentals of supply and demand are bearish,'' said Societe Generale commodities analyst Mike Guido.

Global inventories of crude oil are rising and in the U.S. _ the world's biggest energy consumer _ demand is tapering off. ``There are signs that the housing market could have a bigger impact on the economy going forward,'' he said.

Moreover, pre-summer fears that hurricanes would disrupt Gulf of Mexico oil production have so far not materialized and speculators who had once helped to drive prices higher are now making bets on further declines.

While the market's psychology has clearly shifted, traders remain cautious about the West's diplomacy with Iran over its nuclear program, though they are increasingly less fearful than they once were that Iran will pull oil off the market.

Light sweet crude for October delivery fell $2.14 to $61.66 a barrel on the New York Mercantile Exchange, where gasoline futures tumbled 7.58 cents to $1.5038 a gallon.

It was the lowest close for front-month crude futures since March 21, when oil settled at $60.57. Oil prices have fallen 20 percent from a record settlement of $78.40 a barrel on July 14.

Also influencing trade, analysts said, was the market's preparation for a shift in the gasoline contract. At year's end, the unleaded gasoline contract the market has traded since 1983 will be replaced by a futures contract known as the reformulated gasoline blendstock for oxygen blending, or RBOB, which is already being traded actively on Nymex.

The move stems from the refining industry's decision to introduce ethanol as a substitute for methyl tertiary butyl ether, or MTBE, in summer blends of gasoline. The unleaded gasoline contract had been reformulated for summer with MTBE.

The Organization of Petroleum Exporting Countries confirmed traders' suspicions about the impact of a slowing economy on global demand by announcing that the fourth-quarter demand for its oil would be 320,000 barrels a day lower than previously forecast.

In 2007, OPEC expects demand for its crude to average 28.1 million barrels per day, or 800,000 barrels per day less than the 2006 average, in part because non-OPEC supplies are rising. As a result, some analysts believe the Vienna-based cartel, which is pumping close to 30 million barrels a day, may soon cut its output.

``If we get below $60, they're going to begin to take away barrels,'' Guido said. ``But it's not going to make a difference.''

Some analysts believe trimming production could backfire because it would signal to a market that has worried for several years about tight supplies that the world finally has oil-production capacity to spare.

``OPEC has some tough decisions to make,'' said John Kingston, director of oil at Platts, a division of McGraw-Hill Cos

OPEC President Edmund Daukoru told Dow Jones Newswires Tuesday that the need for an immediate output cut was eased on Monday after BP PLC announced that production at a massive platform in the Gulf of Mexico won't begin before mid-2008. Analysts had been expecting BP's Thunder Horse platform to produce as much as 250,000 barrels a day of oil by early 2007.

``This most certainly does remove the prospect of OPEC cutting production (in the near-term),'' Daukoru told Dow Jones Newswires.