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Oil, gas prices defy recession

OIL and gasoline prices continued a recession-defying march higher yesterday, doubling in the past six months largely on optimism of a strengthening economy.

The predictions for just how high oil can reach this year, just like 2008, continue to creep upward just five months removed from crude priced around US$32 per barrel.

Benchmark crude for July delivery rose US$1.23 to settle at US$66.31 a barrel on the New York Mercantile Exchange.

The gasoline-pump panic of 2008 has yet to surface, but that's not to say there haven't been some double-takes.

Wholesale gasoline prices, which typically rise during this time of the year, are up a staggering 140 percent since Christmas Eve. Retail gasoline prices have hit a national average of US$2.467 a gallon (65 cents a liter), according to auto club AAA, Wright Express and Oil Price Information Service. Pump prices are up 20 percent just in the past month.

But a gallon of gas is still US$1.485 below the price a year ago and that, at its heart, is why you are unlikely to see the same price spikes this time around.

Crude prices have spiked 30 percent this month, enough to give anyone vertigo. But the pain is relative.

At this time last year, crude prices were brushing up against US$130.

While crude has risen fast through May, we're still around US$66.

For gas prices to hit US$3, crude would need to go to about US$100 a barrel, well above even the highest projections this year of US$70 to US$75, said Tom Kloza, publisher and chief oil analyst at Oil Price Information service.

Still many analysts, including Kloza, have been surprised by the run-up in gasoline.

"If you had asked a month ago if we would see a US$2.50 national average, I would have said 'no.'"

The jump in energy prices has not been fueled by rising demand, but a belief that demand will rise at some point. That has created a lot of momentum in a market that does not have the fundamentals to support it.

With demand for gasoline running flat to slightly below last year, unemployment moving higher, and ample inventories and refinery capacity it is hard to see prices much higher from here, said Adam Sieminski of Deutsche Bank.

"We've climbed out of the depths, but it's still not growing on a year-over-year basis," he said.

Just like in 2008, however, the weakened U.S. currency is bringing billions of investments into oil markets. Because crude is priced in dollars, it gets a lot cheaper when the U.S. currency falls.

That points to another speculative bubble that many blame for record prices last summer, on Nymex and at the gas pump.

"It's more hope that fact," Sieminski said. "Investors think the economy has bottomed and possibly recovering and they're moving to assets they think will benefit from the economic recovery and that includes commodities generally and oil specifically."

Gasoline futures have been on a tear as well, even though the government reported again last week that demand for it has fallen.

Retail gasoline prices have followed as refiners, seeing consumers driving billions fewer miles, cut back on production.

In a potentially good sign for consumers, refiners ramped up production last week, according to government reports, even though they are still operating well below normal levels.

This comes at a time when American motorists, whether its because they've lost jobs or are worried about losing a job, are not driving as much. Industries are using far less fuel and natural gas.

The Commerce Department said yesterday that the economy sank at a 5.7 percent pace in the first quarter, worse than the 5.5 percent decline analysts were forecasting.

That does not point to a market that will support a sustained run on prices.

In other Nymex trading, gasoline for June delivery rose 2.05 cents to settle at US$1.931 a gallon and heating oil gained 4.05 cents to settle at US$1.6419 a gallon. Natural gas for July delivery fell 12.2 cents to settle at US$3.835 per 1,000 cubic feet.

In London, Brent prices rose US$1.13 to settle at US$65.52 a barrel on the ICE Futures exchange.


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