Why so high? Oil markets riding new currents.

from the April 19, 2006 edition - http://www.csmonitor.com/2006/0419/p01s03-usec.html

Why so high? Oil markets riding new currents.
A barrel of oil tops $70 - but some analysts say prices may be near a peak.

By Ron Scherer | Staff writer of The Christian Science Monitor

NEW YORK - Perhaps it's a sign of the times, but in some quarters oil has become investors' black gold.

By one estimate, some $125 billion has flowed into commodity index funds often heavily invested in energy. And with oil prices rising faster than the price of land in La Jolla, Calif., or New York's Hamptons, it may seem fashionable to own a piece of old Spindletop. Oil Tuesday hit a record intraday level of $70.88 a barrel in London.

But before investors pour the family fortune into the black goo, analysts are urging caution. Oil is a commodity whose price ultimately depends on supply and demand, they warn. Viewed from that perspective, oil prices already may be near their top - at least for now.

"I think we're due for a pause here," says Mark Routt, of Energy Security Analysis Inc. in Wakefield, Mass. "All the bad news you can think of is in the market, and here we are."

OPEC members have offered oil companies extra deliveries but have been turned down - an indication that there is plenty of crude oil available, Mr. Routt says. In addition, he points out that the current quarter is usually the low point in demand for crude oil. Refineries are busy conducting maintenance or shifting over to the summer blends of gasoline.

The current run-up in price, Routt contends, is more related to stresses in the phasing out of MTBE (methyl tertiary butyl ether), a fuel additive. It is being replaced by ethanol, which is in short supply.

"The price run-up is product-led," he says. "Once the refineries come back on stream, it should take some of the pressure off."
Role of investors is limited

Investors may play a role in short-term price swings.

"Almost everyday it seems some pension fund is dedicating a portion of its assets to invest in a commodity index," says John Kilduff, an oil trader at FIMAT, USA. "And, energy dominates most of these indexes."

Since 2004, Mr. Kilduff says some $125 billion has been directed into these funds. As the investment pool grows, the financial institutions running them buy futures contracts. "It causes more participation, it helps to push up prices," says Kilduff.

A clearer view of these new market participants has emerged, however, as some commodity exchanges have conducted studies of them, says John Felmy, chief economist at the American Petroleum Institute in Washington. "They don't seem be driving the market but following it," he says. "But they can have a transitory impact - the question is for how long."

Last week, the Energy Information Administration forecast peak gasoline prices in the mid-$2.70 a gallon level for the summer. Those levels have already been reached. According to GasPriceWatch.com, the national average is $2.76 a gallon.

Based on the current price of crude oil, Neil Gamson, an analyst at EIA, estimates the price of regular unleaded could "easily" rise another six to seven cents a gallon higher than anticipated. "There is some momentum to continue to rise over the next few weeks, but it might ease a little bit in the later half of the spring as the refining situation sorts itself out."

Consumers are likely to feel the impact in multiple ways, not just at the pump. Tuesday, the Labor Department reported the wholesale price of gasoline rose by 9.1 percent in March. This helped to push the Producer Price Index up by 0.5 percent in the month. Sometimes such spikes get passed on the form of surcharges or additional fees.
A view from the pump

In Boston, Tuesday, Robert Hill was filling up at a Shell station under a sign that posted "$2.69 9/10" for regular gas. "I just feel like it's unnecessary for the public to pay this amount of money," said the retired disabled Vietnam veteran. "I don't think we should be fighting this war. You're losing in two ways: the young men and women over there and at the pump."

Hill wasn't alone in blaming the high prices on America's foreign policy. Srini Prasad, a neurosurgeon, said the effects of the war were compounded by rising energy demand from China.

"Obviously I think it's expensive. It's exorbitant," said Mr. Prasad as he filled up his Mercedes sport-utility vehicle. "I'm kind of worried about the summer to be honest, because I think the prices are going to escalate."

Prasad acknowledged, however, that larger vehicles like his may be part of the problem.

"This car is four years old, so we didn't know how high the prices would be back then," he said. "The next car we bought was a hybrid."

School administrator Vince McKay of Newton, Mass., who was filling his late-model Saab at the same station, said he visited China a year and a half ago as part of an educational group.

"I saw first hand the worldwide demand. Why should we be surprised?" Mr. McKay asked. "This country has got to get serious about conservation and we've got to do it now."

But for McKay, getting "serious" about conservation may mean tough love for motorists like Prasad.

"Personally, I think the government should buy up all the SUVs and crush them," McKay said with a smile.

• Matt Bradley contributed to this report in Boston.

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