Wednesday, March 18, 2009

Oil falls $2 as gasoline supply jumps

Oil prices fell further Wednesday after a government report said supplies of gasoline soared unexpectedly.

At 11:50 a.m. ET, crude prices were down $2.13, or 4.3%, to $47.03 a barrel. Oil traded down $1.07 just prior to the report's release.

In its weekly inventory report, the Energy Information Administration said stockpiles of gasoline increased by 3.2 million barrels in the week ended March 13.

Analysts were expecting an decrease of 2.1 million barrels, according to a consensus estimate compiled by Platts, an energy information provider.

"These continued increases show the supply-demand balance is tight, which points toward risk for further deterioration in the market," said Chris Lafakis, economist at Moody's

Crude supplies increased by 2 million barrels, matching estimates. The EIA report also said distillates, which are used to make heating oil and diesel fuel, rose by 100,000 barrels. Analysts expected supplies to rise 400,000 barrels.

The sluggish global economy has hammered consumer demand for oil, which in turn has caused a glut in supply.

Amid layoffs, pay cuts and general uncertainty about the future of the economy, consumers have scaled back their use of energy. Oil prices have plummeted from a record high of $147.27 a barrel last summer.

OPEC: In response to growing stockpiles, the Organization of Petroleum Exporting Countries - whose members produce about 40% of the world's crude - has been pressured to put a floor under prices.

At an OPEC meeting March 15, the group agreed to reduce supply by a further 800,000 barrels a day to complete promised supply cuts.

Saudi Arabia, the largest oil exporter in the world, doesn't need to cut production more in order to account for other OPEC nations, Oil Minister Ali al-Naimi said in an interview in Vienna.

Member countries Iran and Nigeria are overproducing by 50%, Lafakis said.

"Saudi Arabia has cut more than it was asked to," he said, "They're picking up the slack, and they won't want to institute more cuts without more compliance from these cheating nations."

Lafakis said he didn't expect OPEC to institute more production cuts between now and its next meeting in May. Only "material events" - not a mere continuation of the sluggish economy - could spark cuts, he said.

Gasoline: The national average price for a gallon of regular unleaded gasoline increased to $1.92, up 1 cent from the previous day, according to motorist group AAA.

Fed rate decision: The Federal Reserve's Open Market Committee will end a two-day meeting in which policy makers will decide how to stimulate the economy.

The Fed could keep the benchmark interest rate as low as 0%. The group is scheduled to issue a statement at 2:15 p.m. ET.

With the benchmark rate already at a record-low range of 0-0.25%, traders will instead look to the statement for hints on the economic outlook and announcements of additional efforts to boost the financial system.

"More than any other meeting in recent history, this one's baked into the cake already," Lafakis said. "The market always looks at the Fed, but this time they're not expecting too much."

Outlook: Oil prices will likely rise to $56 a barrel by year's end, Lafakis said

"The economy could get worse, but if it does, OPEC will come in with more cuts," he said. "Member countries have shown they can stop inventory from rising if they are focused on it."

Crude prices will probably bottom around $40 a barrel, with a possible decline to $35 - but nothing like the lows of December and January, Lafakis said.

In the long-term, Lafakis said he expects oil prices to rise to $85 in 2011 and decline back to $70 in 2014.

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