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Supply Worries Push Oil Past $72

April 20, 2006|From the Associated Press

Oil prices leapt above $72 a barrel Wednesday, setting a record for the third straight day and increasing the likelihood that pump prices will keep rising as summer nears.

The rally in oil futures was kicked off by a government report showing U.S. gasoline supplies had shrunk for the seventh straight week. That magnified market jitters about a nuclear dispute between Iran and the international community, as well as supply disruptions in Iraq, Nigeria and the Gulf of Mexico.

Although retail gasoline prices already top $3 a gallon in some parts of the country, motorists are only lightly reducing demand, according to government data. But that could change in the months ahead if higher prices at the pump squeeze discretionary spending, particularly among low-income Americans, economists say.

Wal-Mart Stores Inc., the nation's largest retailer, warned Wednesday that it anticipated its lowest-income customers would spend less in 2006 because of higher fuel expenses.

"As fuel prices go up, it dampens our store sales," said Tom Schoewe, Wal-Mart's chief financial officer.

And American Airlines blamed a $92-million first-quarter loss on higher jet fuel prices, which the company said undermined increased ticket sales and higher fares.

The International Monetary Fund said that higher energy prices may slow global growth as consumers and companies tighten their belts.

Although the U.S. economy is growing more slowly, it is not about to turn south, most analysts agree. But neither are oil prices, traders are betting.

Oil futures contracts through July 2009 are trading above $70 a barrel.

"In effect, the market is saying this is going to be with us for a while," A.G. Edwards & Sons analyst Bill O'Grady said.

Light sweet crude for May delivery climbed as high as $72.40 a barrel Wednesday before settling at $72.17 on the New York Mercantile Exchange, up 82 cents from Tuesday. Crude oil costs have risen about 38% in the last year.

In its weekly report, the U.S. Energy Department said the nation's supply of gasoline shrank by a larger-than-expected 5.4 million barrels last week to 202.5 million barrels, leaving inventories 4.6% below year-ago levels.

Gasoline inventories typically decrease this time of the year as refiners shut plants to perform maintenance ahead of the summer driving season. But there is additional worry about summer gasoline supplies this year because of the prospect of tight supplies of ethanol, which is needed in increasing amounts as refiners phase out their use of methyl tertiary butyl ether, or MTBE -- an additive that helps gasoline burn more cleanly but has been found to contaminate drinking water.

The Energy Department report also showed that average daily gasoline demand since the start of the year is up 0.9%, compared with an increase of 1.4% during the same period in 2005.

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