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Oil nudges $120 a barrel

The Associated Press, Reuters

Tuesday, April 22, 2008

NEW YORK — Crude surged more than $2 (U.S.) to within a hair of $120 a barrel on Tuesday on supply concerns from Nigeria and the North Sea.

Light, sweet crude for May delivery rose $1.89 to close at $119.37 on the New York Mercantile Exchange after hitting an all-time peak of $119.90 earlier.

The May contract expired after the Nymex closed, which contributed to its spike higher as investors scrambled to square bets. June crude futures, which now become the focus of trading, rose $1.44 to settle at $118.07 a barrel, nearly $2 shy of the $120 level. Many investors see commodities such as oil as a hedge against inflation and a falling dollar. Also, a weaker greenback makes oil cheaper for investors overseas.

The U.S. dollar fell Tuesday after the National Association of Realtors said sales of existing homes fell in March while the median home price declined, raising prospects that the Federal Reserve will cut interest rates further this year to try to shore up the ailing economy. Fed interest rate cuts tend to further weaken the dollar.

Oil also rose on concerns about supply constraints overseas. A Royal Dutch Shell PLC joint venture declared what's known as force majeure on April and May oil delivery contracts from a 400,000-barrel-a-day Nigerian oil field due to a pipeline attack last week. The move protects the company from litigation if it fails to deliver on contractual obligations to buyers.

In Mexico, oil production slipped 7.8 per cent in the first quarter to 2.91 million barrels a day as output at the country's oil fields waned, state oil company Petroleos Mexicanos said. In Scotland, workers at Ineos PLC's 196,000 barrel-a-day Grangemouth refinery and petrochemical plant threatened to strike over changes to an employee pension plan.

U.S. gasoline prices, meanwhile, reached a national average of $3.51 a gallon or the first time.

At the pump, the national average price of a gallon of regular gas rose 0.8 of a cent to $3.511, according to a survey of stations by AAA and the Oil Price Information Service. Prices for diesel — the fuel used for the transport of most food, industrial and commercial goods — also rose overnight to a new record of $4.204 a gallon.

U.S. gas prices are nearly 66 cents higher than last year, when prices peaked at a then-record of $3.23 in late May, and have prompted many analysts to raise their estimates of where gas is going to go.

“I wouldn't rule out the possibility that we could get to $4,” said Antoine Halff, an analyst at Newedge USA LLC.

Other analysts are less certain. Fred Rozell, retail pricing director at the Oil Price Information Service, thinks gas prices will rise only another 10 cents to 20 cents nationally. That would mean they would peak near $4.15 a gallon in California, where prices are typically highest, and around $3.50 in New Jersey, where they're typically lowest.

While gas prices are following oil futures higher, they're also rising because supplies are falling. Refiners are in the process of switching over from making winter grade gasoline to the more-expensive, less-polluting, form of the fuel they're required to sell in summer. That's pushing supplies down as producers try to sell off all of their winter gas.

Gasoline supplies are also being hurt by low profit margins on the fuel. Refiners have to buy the crude they turn into fuel, but falling demand for gasoline has hurt their ability to raise gas prices as much as they would like. While the average profit margin on gasoline hovers above $10, analysts say margins have gone negative in some parts of the country in recent weeks. In those cases, refiners were actually losing money on every gallon of gas they made. Many refiners have reacting by producing less gas.

“Very high crude prices can constrain gasoline supplies as it hurts the margins,” Mr. Halff said.

In other Nymex trading Tuesday, May gasoline futures rose 3.73 cents to settle at $3.0164 a gallon after earlier rising to a trading record of $3.025, while May heating oil futures rose 0.55 cent to settle at $3.3169 a gallon after earlier rising to their own trading record of $3.35. May natural gas futures fell 12.6 cents to settle at $10.607 per 1,000 cubic feet.

In London, June Brent crude rose $1.52 to settle at $115.95 a barrel on the ICE Futures exchange.

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