Oil, gas prices fall after OPEC move

Oil and gasoline prices have begun to head down as OPEC nations yesterday said they would increase oil production, and fuel supplies in the United States reached their highest levels in almost two years.

While analysts said that energy prices have probably peaked for now, they warned motorists not to expect $1.50-a-gallon gas anytime soon. Demand continues to grow as Americans drive more, thanks to the improved economy; refiners are already running at full bore with little additional capacity in the works; and energy trading markets remained concerned that Saudi Arabia will be the target of another terrorist attack, one that could disrupt supplies from among the world's largest producers.

"I don't think we're going to have cheap gas or cheap oil, but we're definitely coming off these peaks," said Sarah Emerson, a petroleum specialist at Energy Security Analysis Inc., a research and consulting firm in Wakefield. Prices are "heading down, but it's not going to be a smooth ride at all. We're going to have a lot of volatility."

Crude oil prices fell to $39.28 a barrel, down more than $3 from the record posted on Tuesday. Gasoline prices for futures contracts fell almost 5 percent in trading in New York yesterday afternoon, and are now around 22 cents below prices posted last week.

It typically takes one to two weeks for wholesale prices to trickle down to the pump level, but gas prices nationally fell by a penny last week, the US Energy Department reported yesterday. The slight drop "may indicate the beginning of a decline in retail prices over the next couple of weeks," the department said in its weekly report.

The Organization of Petroleum Exporting Countries started off a busy day in energy markets with its pronouncement that it would increase its self-imposed production ceiling by 2.5 million barrels a day over the next two months. While markets reacted favorably, analysts noted that OPEC members already are producing beyond their supposed limits, and Saudi Arabia had previously signaled that more oil production was on the way.

Adam E. Sieminski, an analyst for Deutsche Bank in London who follows oil markets, said the additional supplies from OPEC should push oil prices down another $4 to $5 a barrel, and "that ought to take a dime off the price of gasoline." He and other analysts said the OPEC announcement provided an excuse for speculators who've driven up the price of oil and gas in trading markets recently to take profits and pull out.

Others disagreed on OPEC's importance. Michael Lynch, president of Strategic Energy & Economic Research Inc. in Winchester, noted that much of the additional oil from the Middle East won't arrive in the United States for weeks or months, and is typically lower-quality crude that doesn't produce as much gasoline per barrel as higher-grade oil from other suppliers.

Moreover, with refineries in the United States reporting running at 95 percent capacity, Lynch said "the refining sector in this country is pretty much flat-out, so they can't do anything with this" additional oil.

Lynch said that OPEC supplies around 25 percent of US oil needs, with the largest contribution coming from domestic sources. And while pledging to continue efforts to stabilize prices, Indonesian energy minister Purnomo Yusgiantoro, president of the OPEC conference, noted the cartel is already producing near capacity and warned. "We can only do so much in the present situation."

Still, another source of relief for consumers was a report from the Energy Department yesterday that inventories of crude oil in the United States rose by 2.8 million barrels last week, their highest level since August 2002, and gasoline inventories increased by 1.3 million barrels. "The higher inventories are, the more flexibility is inherent in the system, thus relieving some price pressure," the department said in its weekly analysis.

This relief, however, may be short-lived. Inventories are still well below historical averages, and analysts said there are host of political issues, both domestic and international, that will keep prices up and could send them even higher.

One is the constrained capacity of the US refinery industry. The industry blames the lack of new facilities on local opposition to such facilities and strict pollution-control rules. The Bush administration has suggested it might consider streamlining permitting for new facilities, and easing environmental rules that require numerous blends of cleaner-burning gas in different markets around the country.

But some Democrats in Washington have accused the Republican administration of going soft on the petroleum industry as it went through a spate of mergers and consolidation in recent years, leading to market concentration among a few large companies. Last month the General Accounting Office released a study of petroleum mergers that concluded the market concentration did in fact drive up prices of various types of gasoline by several cents. Moreover, many of the major producers, such as ConocoPhillips, reported higher margins on refinery operations in recent earnings reports.

Existing production capacity right now is so tight that Tom Kloza, chief oil analyst for the Oil Price Information Service in Lakewood, N.J., predicts that gasoline prices could be higher on the Labor Day weekend, at the end of the summer driving season, than they were this past Memorial Day weekend. "When you get to the back end of the driving season and you're using more gasoline than you're making, you've got a problem." he said.

Internationally, Nigeria and Venezuela continued to experience political and labor strife that analysts worry could interrupt supplies from these major oil producers. But analysts said the major concern of markets continues to be with Saudi Arabia, which in the last month alone experienced two terrorist attacks near oil installations. Another attack, they said, is likely to send prices soaring again.

Andrew Caffrey can be reached at caffrey@globe.com.