Why oil prices are stubbornly high
Drivers have been paying about 10 cents more for a gallon of gas since Dec. 31.
It's the New Year's event few consumers want to see: higher bills at the gas pump.Skip to next paragraph
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But since the crystal ball fell at Times Square, the price of oil has hovered close to the $100-a-barrel level, despite some predictions it will fall in 2008. With oil up, the price of gasoline has risen 10 cents a gallon since Dec. 31, according to GasPriceWatch.com.
Among the reasons that energy analysts cite for crude oil's strong showing so far:
•US inventories are now at a three-year low. This is prompting some analysts to call for the Energy Department to stop putting oil into the nation's Strategic Petroleum Reserve (SPR) so the oil instead can be used in the marketplace.
•Trouble is brewing in the Nigerian oil patch. Hope that Nigeria's politicians could smooth over problems in sharing the oil wealth are fading amid reports of continued unrest and possible future attacks on the oil infrastructure, analysts say.
•Nervous investors are continuing to pump money into commodities, such as gold, silver, and oil, which drives up their prices. A weak dollar also tends to drive up oil prices.
"We have a little bit of an oil bubble right now," says Phil Flynn, vice president of energy research at Alaron Futures and Options in Chicago. "It could go back to $100 a barrel because it's so close right now, but I think the price is acting very top-heavy."
Some energy traders would not be surprised to see the price of oil remain relatively strong in the first quarter. "We'll see spates of rallies, but the first quarter will be the high point for energy," says John Kilduff, a New York-based trader at MF Global, a large futures broker.
Year-end, inventories tend to be low
Although oil inventories are low, some energy analysts expect them to be restocked this year. Oil companies normally try to reduce their inventories at year-end, says Rick Mueller of Energy Security Analysis Inc. of Wakefield, Mass. "But there is no question: We are at the lower end of the comfort zone," he says.
Oil inventories are down 60 million barrels since July, Mr. Mueller says. "It's a disturbing trend," he says.
On Wednesday, the Energy Information Administration reported that crude-oil inventories fell 6.8 million barrels for the week ending Jan. 4 – the eighth consecutive week they have dropped. One trader blamed bad weather around the Houston ship channel last week. He expected an adjustment next week. Nonetheless, the price of oil jumped on the news.