[Rhodes22-list] Good News - Gas Prices Falling

[Brad Haslett]

 <http://seattletimes.nwsource.com/html/home/>

Thursday, September 14, 2006 - 12:00 AM

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**Analyst predicts plunge in gas prices*

*By Kevin G. Hall*
*McClatchy Newspapers*

WASHINGTON — The recent sharp drop in the global price of crude oil could
mark the start of a massive sell-off that returns gasoline prices to lows
not seen since the late 1990s — perhaps as low as $1.15 a gallon.

"All the hurricane flags are flying" in oil markets, said Philip Verleger, a
noted energy consultant who was a lone voice several years ago in warning
that oil prices would soar. Now, he says, they appear to be poised for a
dramatic plunge.

Crude-oil prices have fallen about $14, or roughly 17 percent, from their
July 14 peak of $78.40. After falling seven straight days, they rose
slightly Wednesday in trading on the New York Mercantile Exchange, to
$63.97, partly in reaction to a government report showing fuel inventories a
bit lower than expected. But the overall price drop is expected to continue,
and prices could fall much more in the weeks and months ahead.

Here's why:

For most of the past two years, oil prices have risen because the world's
oil producers have struggled to keep pace with growing demand, particularly
from China and India. Spare oil-production capacity grew so tight that
market players feared that any disruption to oil production could create
shortages.

Fear of disruption focused on fighting in Nigeria, escalating tensions over
Iran's nuclear program, violence between Israel and Lebanon that might
spread to oil-producing neighbors, and the prospect that hurricanes might
topple oil facilities in the Gulf of Mexico.

Oil traders bet that such worrisome developments would drive up the future
price of oil. Oil is traded in contracts for future delivery, and companies
that take physical delivery of oil are just a small part of total trading.
Large pension and commodities funds are the big traders and they're seeking
profits. They've sunk $105 billion or more into oil futures in recent years,
according to Verleger. Their bets that oil prices would rise in the future
bid up the price of oil.

That, in turn, led users of oil to create stockpiles as cushions against
supply disruptions and even higher future prices. Now inventories of oil are
approaching 1990 levels.

But many of the conditions that drove investors to bid up oil prices are
ebbing. Tensions over Israel, Lebanon and Nigeria are easing. The hurricane
season has presented no threat so far to the Gulf of Mexico. The U.S. peak
summer driving season is over, so gasoline demand is falling.

With fear of supply disruptions ebbing, oil prices began sliding. With oil
inventories high, refiners that turn oil into gasoline are expected to cut
production. As refiners cut production, oil companies increasingly risk
getting stuck with excess oil supplies. There's already anecdotal evidence
of oil companies chartering tankers to store excess oil.

All this is turning financial markets increasingly bearish on oil.

"If we continue to build inventories, and if we have a warm winter like we
had last winter, you could see a large fall in the price of oil," said Gary
Pokoik, who manages Hedge Ventures Energy in Los Angeles, an energy hedge
fund. "I think there is still a lot of risk in the market."

As it stands now, the recent oil-price slump has brought the national
average for a gallon of unleaded gasoline down to $2.59, according to the
AAA motor club. In the Seattle area, prices per gallon have fallen to $2.856
currently from $3.071 a month ago, a decline of 7 percent, according to AAA.

Should oil traders fear that this downward price spiral will get worse and
run for the exits by selling off their futures contracts, Verleger said,
it's not unthinkable that oil prices could return to $15 or less a barrel,
at least temporarily. That could mean gasoline prices as low as $1.15 per
gallon.

Other experts won't guess at a floor price, but they agree that a race to
the bottom could break out.

"The market may test levels here that are too low to be sustained," said
Clay Seigle, an analyst at Cambridge Energy Research Associates, a
consultancy in Boston.

On Monday, the oil-producing cartel OPEC hinted that if prices fall
precipitously, OPEC members would cut production to lift them. But that
would take time.

"That takes six to nine months. If we don't have a really cold winter here
[creating a demand for oil], prices will fall. Literally, you don't know
where the floor is," Verleger said. "In a market like this, if things start
falling ... prices could take you back to the 1999 levels. It has nothing to
do with production."

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