Uptick on gas price awaits vacationers
Just when you thought it was safe to go back on the road, ``Oil Prices II'' premiers at gas stations near you. Americans will be paying more in the weeks ahead for gasoline, and doing so just as summer driving season begins in earnest.
But they'll be paying only a little more.
Prices are still way down from a year ago. That continues to make car trips attractive to many vacationers -- and it continues to hold down the inflation rate. On Wednesday, for yet another month, the government reported that gasoline prices drove down the consumer price index; the index fell 0.3 percent in April.
But with oil futures prices back up to $16 to $18 a barrel, many analysts think that could be one of the last of the inflation decreases this year.
Still, bankers and economists can now breathe easier about the financial conditions of oil nations such as Mexico and Venezuela, of oil companies in Texas and Oklahoma, and of banks with loans out to these areas.
``Eighteen dollars a barrel is really the optimum price,'' says William Randol, chief oil analyst with First Boston, the New York securities firm.
``It's good for consumers. It's a number that industry can live with. Eighteen dollars a barrel is still no picnic in places like Houston, but it's much more viable.''
The key to understanding crude oil today is to realize that prices are not going in any one direction for a sustained period of time. Oil is very much a commodity, like sugar, coffee, and copper. It rises and falls in price depending on supply and demand, good news and bad news, and the expectation of commodity traders.
By now almost everybody has heard about the sharp drop in crude oil prices that began early this year. By late March, prices had fallen from around $30 a barrel to $10. Even the scriptwriters of the ``Dallas'' TV show had to take that into account; they made J. R. Ewing's oil empire go through a financial squeeze.
But the story of the past few weeks has been just the reverse of this. On the New York Mercantile Exchange (Nymex), oil futures prices have risen dramatically from their low of less than $10 a barrel the week of March 28 to the mid-teens now. On Monday they registered more than $17. That represents a 75 percent gain.
With that kind of gain, oil traders naturally decided to take profits, and on Tuesday prices fell their maximum allowable, back down to $16 a barrel. On Wednesday they firmed up somewhat.
Sanford Margoshes, a veteran oil analyst with Shearson Lehman Brothers, sees oil futures continuing to trade in a range of $14 to $22 a barrel, and he expects that by the end of the year it will be between $20 and $22. His reason, echoed by other analysts, stems from:
Strong gasoline demand in the United States. This is pulling up crude oil prices.
The possibility of an agreement at the June 25 Organization of Petroleum Exporting Countries meeting on the Yugoslav island of Brioni. Saudi Oil Minister Ahmad Zaki Yamani has been less confrontational in tone lately. Kuwait Oil Minister Ali al-Khalifa told a Kuwait daily newspaper he expects oil prices to rise and OPEC's market share to increase.
Tightening of oil supplies. Production cutbacks in the US due to lower prices have begun to take hold. Most British and Norwegian North Sea wells are shutting down for routine maintenance this month. Norway, under its new socialist government, has indicated it is willing to rein in production to help stabilize world prices.
Intensification of the Iran-Iraq war, including attacks on tankers heading for the Saudi oil port of Ras Tanura and Iranian threats to close the Strait of Hormuz. Mr. Margoshes says he expects a major Iranian offensive when the Muslim holy month of Ramadan ends June 8.
From the point of view of technical analysis, Joseph Barthel of the Butcher & Singer brokerage in Philadelphia says his charts foreshadowed a big rally last month by showing a classic ``inverted head-and-shoulders bottom formation'' for heating oil, crude oil, and unleaded gas on the Nymex in February, March, and April.
Now, Mr. Barthel says, oil futures appear to have a ``technical bottom'' of $14 a barrel and a top of $18 to $20. He sees prices moving slowly to the higher level.
``There won't be an explosive up move,'' he says. ``This market needs confidence building.''
It needs confidence because the fundamental problems among oil producers could cause prices to slip again. In a recent report, Frederick P. Leuffer, senior oil analyst at the Cyrus J. Lawrence securities firm, noted that OPEC is producing at only 60 percent of capacity.
``We look for prices to average in the mid-teens for two to three years before reduced exploration and development curtail supply and longer-term demand elasticities begin to work,'' Mr. Leuffer noted.