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Oil prices pull back from record highs

June 4, 2008 12:41:32 PM PDT
Oil prices extended their drop from record highs Wednesday, falling to the $122 level after the Energy Department said gasoline demand fell sharply last week. Retail gas prices, meanwhile, rose to a new record above $3.98 a gallon and are likely to hit $4 in coming days, although oil prices have retreated nearly $13 from last month's record levels.

In its weekly inventory report, the department's Energy Information Administration said demand for gasoline fell by 1.4 percent over the last four weeks. Meanwhile, gasoline inventories rose by 2.9 million barrels last week, more than three times the increase analysts polled by energy research firm Platts had expected.

Concerns about demand have helped pull oil down from its May 22 high of $135.09. Those concerns were exacerbated Wednesday by the EIA report and by moves by India and Malaysia to cut fuel subsidies, effectively raising prices. Many investors believe subsidy cuts will choke off demand for fuel in the developing world.

"There's definitively smaller demand, (and) you have subsidies that are going to fall in energy consuming nations," said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com. "The psychology is just changing."

Light, sweet crude for July delivery fell $2.01 to settle at $122.30 barrel on the New York Mercantile Exchange after earlier falling as low as $121.84. It was oil's lowest settlement since May 6. July gasoline futures plummeted 15.74 cents to settle at $3.1951 a gallon.

The EIA also said inventories of distillates, which include diesel and heating oil, rose by 2.3 million barrels. Investors shrugged off an unexpected decrease in crude oil inventories.

At the pump, meanwhile, the national average price of a gallon of regular gas rose half a cent overnight to $3.983, according to a survey of stations by AAA and the Oil Price Information Service. Prices are likely to reach $4 for the first time regardless of what happens with oil prices, said Fred Rozell, retail pricing director at the OPIS, which is based in Wall, N.J.

"I think there's enough momentum that we'll hit it," Rozell said.

Prices are already higher than $4 in many parts of the country, and average more than that in 13 states and the District of Columbia.

While the cost of oil accounts for the vast majority of the price of a gallon of gas, other factors - including gasoline supplies and refining margins - can also affect the price. Refining margins are slim because oil prices have nearly doubled over the past year, while gas prices have risen only 27 percent.

While oil prices have retreated, refiners, gasoline wholesalers and retailers remain under pressure to raise prices to improve their margins, analysts say. That pressure is why gas prices are likely to go higher.

Still, Rozell said, if gas prices get to $4 nationally, they aren't likely to stay there for long: "I think we've pretty much petered out unless there's an event that affects supply."

Even if oil prices remain where they are, gas prices will likely fall 5 cents to 7 cents over the next week, though they may first briefly hit $4, Cordier said.

Diesel prices are already falling; the average national price of a gallon of diesel slipped 0.2 cent overnight to $4.778, according to AAA and OPIS. Diesel prices peaked at a record $4.792 on May 30, and are averaging more than $5 in some areas.

While they may be falling now, sky-high diesel prices have boosted the price of food and other goods carried via truck, train and ship. Prices of other types of fuel, including jet fuel, also have spiked this year. On Wednesday, United Airlines said it would cut 1,100 jobs and cut 100 airplanes from its fleet due to high fuel prices.

In other Nymex trading, July heating oil futures fell 9.38 cents to settle at $3.5458 a gallon, while July natural gas futures rose 15.8 cents to settle at $12.379. Natural gas futures were again boosted by forecasts for hot temperatures in parts of the U.S. this weekend, which could boost demand from utilities for electricity generation.

In London, July Brent crude futures fell $2.48 to settle at $122.10 a barrel on the ICE Futures exchange.



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