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Glut of Gas Brings Relief at the Pump

Fuel: Higher production is lowering prices for motorists in time for summer vacations. It also sends gasoline futures sinking to 17-month low.

June 28, 2001|JAMES F. PELTZ | TIMES STAFF WRITER

Pump prices for gasoline, already falling faster than expected, are poised to tumble more following another sharp drop in prices of gasoline and crude oil traded on financial markets Wednesday, analysts said.

With prices for self-serve regular already dipping below $1.80 a gallon in some parts of Southern California, the outlook is for even lower prices because of continued robust production at oil refineries that's swelling gasoline supplies.

Service station dealers are likely to hold prices fairly steady through July 4--to profit from all the holiday travelers hitting the road--but retail prices probably will resume their decline after that, analysts said.

"The thoughts of $3-a-gallon gasoline are a distant memory," said John Kingston, global director for oil at Platts, an energy information firm in New York.

Indeed, only six weeks ago average prices in California hit a record- high $1.954 a gallon, feeding speculation that gasoline might reach $3 a gallon before the busy summer driving season was over.

But oil refiners, enjoying hefty earnings from the spike in prices, have been churning out gasoline at a feverish pace. As a result, gasoline supplies have risen for more than two months, outpacing motorists' demand for fuel and lowering pump prices much sooner than many had forecast only a few weeks ago.

"On the street, prices are much lower than we thought they would be at this time of year," said Mary Welge, senior editor of Oil Price Information Service, an industry newsletter in Lakewood, N.J.

"Right now, we're seeing gasoline supplies at their highest levels since June 1999," she said. That's reducing prices at the wholesale level, which in turn "has certainly trickled down to the retail gasoline stations."

That's welcome news to the 31.8 million Americans who plan to travel by car more than 50 miles from home July 4, according to estimates from the American Automobile Assn. Overall, 36.6 million Americans plan to travel that day, up slightly from 36.3 million last year, the group said.

"Drivers will be pleased that they're getting relief from the high prices that they suffered through" this spring, AAA spokesman Geoff Sundstrom said.

The latest evidence of bulging gasoline supplies came late Tuesday, when the American Petroleum Institute reported the 10th straight week of rising inventories and a higher-than-expected increase in the nation's crude-oil supplies for the week ended Friday. In fact, U.S. gasoline production that week--5.59 million barrels a day--was a record for the third week in June, the trade group said.

That sent prices for gasoline futures contracts falling to a 17-month low, and crude-oil futures to their biggest one-day loss since March 28 in commodities trading Wednesday.

Gasoline for delivery in July skidded 6.35 cents, or 8.2%, to 71.44 cents a gallon on the New York Mercantile Exchange. Gasoline futures have plunged 39% since peaking at $1.175 a gallon May 24.

Crude-oil futures for August delivery plummeted to $25.61 per 42-gallon barrel from $26.98 on Tuesday on the Nymex, a 5.1% decline that pushed oil prices near their lowest level since April 2000.

Wednesday's action in the commodities market also sent oil company stocks lower in New Stock Exchange trading. Exxon Mobil Corp. fell $1.34 to $87.22 a share, Chevron Corp. lost $3.30 to $91.40, Tosco Corp. fell $1.68 to $43.20, Valero Energy Corp. declined $1.47 to $36.03, and Ultramar Diamond Shamrock Corp., which Valero is planning to buy, fell 78 cents to $46.95.

Gasoline prices jumped this spring because the fuel was in tight supply, crude-oil prices were rising and motorists' demand for gas remained as strong as ever. Though bad news for consumers, the higher prices were welcome by gasoline refiners and dealers, which had struggled with thin profit margins in recent years.

But since peaking in mid-May at an average $1.954 a gallon, prices for self-service regular gasoline in California have been gradually and steadily declining. They stood at $1.901 a gallon as of Monday, and the national price had dropped to $1.538 a gallon, according to the Energy Department. (California prices are higher because of costs related to the state's strict environmental laws.)

Service station owners will try as long as possible to keep prices at current levels to reap the higher profits while they can, analyst Welge said. "You're not going to see prices drop 10 cents [a gallon] in the next week," she said.

But Platts' Kingston said "ultimately that can't go on" because of the stiff competition in the gasoline market, especially in California. "Someone will see the opportunity to cut prices by a little and still make money and grab more market share," he said. "Then the others will have to match them."

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Times wire services were used in compiling this report.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

Supply Surge

U.S. gasoline inventories continue to rise sharply, putting renewed downward pressure on prices.

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Gasoline inventories in millions of barrels, monthly data

June 22: 222.9 million barrels

Sources: American Petroleum Institute, Bloomberg News

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