Posted on: Friday, December 3, 2004
Dwindling fears sink price of oil
By Robert Manor
Chicago Tribune
CHICAGO — Oil prices sank for the third straight day yesterday amid signs that the fear of petroleum shortages is loosening its grip on the market, bringing the decline since Monday to more than 12 percent, the sharpest drop since the U.S.-led invasion of Iraq in March 2003.
Crude oil for January delivery closed at $43.25 a barrel, down $2.24, after briefly trading below $43 on the New York Mercantile Exchange. The price of oil has fallen 22 percent since hitting a record high of $55.67 in late October, and the close was the lowest since Sept. 10.
Industry analysts said petroleum prices over the summer were lifted by an exaggerated "risk factor," including the possibility that Middle East conflict would escalate.
David Sykuta, executive director of the Illinois Petroleum Council, said gas prices never rose as high as expected when petroleum peaked. That indicates the market for crude was unrealistically inflated, he said, and not driven by supply and demand, as is usually the case.
"There has always been some fear factor built into this speculation on crude oil prices," Sykuta said. "I think some drop in the price is a lessening in the fear factor."
Gasoline prices tend to rise and fall with petroleum, but the relationship is imprecise because gas costs are influenced by many other factors, such as taxes.
Political unrest in Venezuela and Nigeria, both big producers, has not affected oil output that much. And, so far at least, the conflict in Iraq has not spread to Saudi Arabia, Kuwait and other Middle Eastern oil producers.
Sykuta also said oil production and refining in states along the Gulf Coast have recovered from hurricanes that struck the region this year.
The area is the nation's second-largest domestic supplier of oil, after Alaska.
The government on Wednesday said that helped boost crude supplies last week by 900,000 barrels, to 293.3 million, nearly 10 million higher than a year ago.
Donald Jones, chief economist for RCF Economic and Financial Consulting in Chicago, doesn't believe the spike in oil prices damaged the economy.
"It has just zippo effect on inflation," said Jones, who thinks crude is headed lower in the months ahead, into the range of $30 to $39 a barrel.
Other analysts think it will go even lower.
"Our base case assumes that crude oil prices will revert to $24 a barrel" next year, said Pablo Lutereau, a Standard & Poor's analyst, in a report on the prospects for Latin American oil and natural gas.
