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SAN FRANCISCO (CBS.MW) -- Get ready to dig deeper into
your pockets at the gas station this summer: $3 per gallon gasoline could
be headed to a pump near you.
The expanding U.S. economy, limited supplies of certain blends and
unexpected output cuts by major producing nations will likely propel U.S.
retail prices well past their record high, industry experts said.
The Organization of Petroleum Exporting Countries, which supplies 40
percent of the world's oil, agreed Feb. 10 to rein in an estimated 1.5
million barrels of daily overproduction. Members also voted to cut their
official output target by 1 million barrels to 23.5 million barrels a day,
excluding production from Iraq, starting April 1.
The cartel's action comes as the national retail price of gas is only
10 cents below the all-time average high of $1.73 a gallon reached last
August.
"OPEC's decision ... is one more reason on an already lengthy list of
why U.S. consumers are likely to pay the highest gasoline prices on record
this year," AAA spokesman Geoff Sundstrom said.
Gas prices "will certainly breach" the $2 mark on the back of OPEC's
announcement, said Kevin Kerr, a senior trading director at KWEST Trading
International. "At the same time, the economic recovery in the United
States and other parts of the world ... and the draw on existing energy
supplies could be disastrous."
Since the oil market didn't anticipate OPEC's dramatic moves, "the
shockwave will be felt all the way to the pumps," Kerr said.
A survey of the five market analysts found all agree that retail gas
prices will, at the very least, hit a new record this year.
Indeed, if crude inventories don't increase, and if OPEC votes to cut
another 5 percent from its output, unleaded gas prices could reach the
"upper limits of $2.75 to $3 this summer," said John Person, head
financial analyst at Infinity Brokerage Services.
Dollar blame
One of the cartel's key reasons for the production cut -- a weaker U.S.
dollar -- factors into expected price climb, thought the experts disagreed
about its level of importance.
"Over and over again, OPEC raised crude oil prices ... saying the
weaker dollar brings member nations lower revenues because oil is traded
in dollars," Kerr said. "It isn't rocket science to figure out they will
likely do this again with the dollar reaching new lows."
Fimat USA analyst John Kilduff sees a different driver. He said the
dollar's decline coincides with a much bigger factor for oil prices: "The
lowest U.S. crude-oil inventories in a generation."
Yet Tom Kloza, chief oil analyst at the Oil Price Information Service
in Lakewood, N.J., believes the 2004 gasoline price rally won't be about
crude, but about the level of gas supplies. "When traders fear a product
may be 'short' as the season approaches, or when it actually is short or
tight within [the] season, prices tend to migrate toward hyperbolic
numbers."
Contributing factors
Retail prices will likely surpass $2 a gallon in two separate spikes,"
Kloza said, "one in the spring based on fear and uncertainty, and another
toward the end of the summer."
The initial price jump will come during the transition from winter to
summer blends of gasoline, which typically puts a strain on supply
availability, Kloza said.
A variety of new state environmental regulations regarding gasoline
formulation are having an increasingly disruptive impact on supplies,
Fimat's Kilduff said.
"The mosaic formulation scheme that caused severe price spikes in
California and the upper Midwest in the recent past is now coming to the
New York Tri-State area, due to New York and Connecticut adopting ethanol
as their oxygenation component, " he said. New Jersey has remained with
the MTBE formulation, he added.
In addition, by July and August, the market might be experiencing
average demand of 9.5 million barrels a day or higher at a time when
production will likely top out at 8.8 million barrels or so, Kloza
said.
With the economy gaining strength, this summer is "on pace to be a
banner demand year," agreed Agbeli Ameko, a managing partner at
energy-forecasting firm, Enercast Inc. "Supplies are lower and production
is not keeping pace with this demand growth."
AAA's Sundstrom also noted that some travel experts expect robust
spring and summer vacation seasons. That's a recipe for a peak-driving
season where the supply and distribution system has no room for error,
Kloza said.
"A refinery problem or two, an inordinate surge in demand, a loss of
say, Venezuelan imports ... all this would create the much hackneyed
'perfect storm' characterization."
Paying the ultimate price
While Infinity's Person sees prices peaking at $3 in some metro areas
in the worst of circumstances, OPIS' Kloza sees average prices rising
above $2 but reaching the high-$2 range for only a brief period if at all.
If any region sees prices near $3 a gallon, it would be already
high-priced markets like California and Chicago and would occur only after
a refinery outage or two, he said.
"The gasoline market will have an irregular heartbeat ... racing at
times and resemble brachyadia at others," Kloza said. "The overall retail
average for the year will be the highest ever," but there will a huge gap
between the highest and lowest prices, which could still run as low as $1
a gallon in some states.
Fimat's Kilduff said it would be difficult for average prices to climb
much higher than $2. "Some sort of government intervention would occur at
levels around $2.25," he said, though he did accept the possibility of $3
gas in certain snag-prone areas, such as California.
Enercast's Ameko argued that federal and state politicians would likely
intercede rather than sit idly by should prices skyrocket.
"Going into an election year, $3 retail prices would spell disaster,"
Ameko said. He doesn't expect demand to be strong enough to lift prices
above $2.25, and suggested prices will average around $2.15. Myra P. Saefong is a reporter for CBS.MarketWatch.com in San
Francisco.
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