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ENERGY

Price of oil surges back above $120

Analysts say tensions between Russia and the West and the weaker dollar are behind the increase.

August 22, 2008|Elizabeth Douglass | Times Staff Writer

A weaker dollar and rising tensions between Russia and the West sent oil prices roaring more than $5 a barrel higher Thursday, a move that all but erases hopes that the cost of gasoline will keep falling ahead of Labor Day travel.

Analysts cited the slumping value of the dollar and the lingering standoff between Russia and neighboring Georgia, and traders rushed to cover their bets that oil prices would decline.

"It was a combination of things, and they all came together to cause the move we saw today," said Michael Busby, manager of oil trading at NIC Holdings Corp. in Melville, N.Y.

Others, however, said the increase -- to $121.18 a barrel, up $5.62 -- was mostly driven by the kind of speculative trading that contributed to oil's run-up earlier this summer.

"Speculators are in the driver's seat and they're driving our economy right over the cliff," said Dan Gilligan, president of the Petroleum Marketers Assn. of America.

Gilligan pointed to slumping demand and the recent rise in U.S. crude oil inventories as proof that movements in the oil market are disconnected from traditional supply-and-demand fundamentals.

A long string of declines had lopped more than $30 off the cost of crude since it peaked at $147.27 a barrel on July 11, giving consumers a break from record-high pump prices and sparking predictions that oil would drop below $100.

But Thursday's jump in the cost of oil, Gilligan said, "is going to hit the U.S. consumer squarely in the wallet in a day or two."

Oil's advance Thursday was part of a broad rally in commodities. A widely followed commodities index, which like oil had mostly tumbled since hitting a record high in early July, shot up 3.7%. Silver, copper, corn and soybeans all rose sharply.

The surge in commodities was attributed mostly to the weakening dollar. An index of the dollar's value against several major currencies sank 1%. Weakness in the greenback makes commodities, which are denominated in dollars, cheaper for non-U.S. buyers and encourages investors to buy things such as oil and precious metals as a hedge against inflation.

Oil prices had continued to fall last week even as Russian forces pressed farther into Georgia, a key conduit for oil supplies for Europe and other Western nations. The conflict forced British oil giant BP to close key oil and natural gas transportation routes as a precaution -- and they have not yet been reopened.

Analysts expected the disruption to be short-lived, especially after Russia agreed to withdraw its troops. But Russian troops subsequently arrested Georgian soldiers guarding a civilian port and, instead of fully retreating, have begun setting up checkpoints in undisputed areas of Georgia. Then Poland agreed to host a U.S. missile defense project, and Russian leaders threatened to retaliate.

"This Russian thing is significant if in fact they don't leave," Busby said. "By occupying the country, the operators of those [pipeline] facilities may choose not to operate them because the risk is too high."

Jim Ritterbusch, president of an oil trading advisory firm in Galena, Ill., said the Russian conflict "injected a fresh round of geopolitical risk premium" into the price of oil.

For the moment, anyway, gasoline prices are continuing to fall. The nationwide average cost of self-serve regular fell to $3.702 a gallon Thursday, down from $3.717 on Wednesday and well below the peak price of $4.114 on July 17, according to AAA.

In California, the statewide average fell below $4 to $3.993 a gallon Thursday, down 2.5 cents from Wednesday.

Ritterbusch said he hadn't ruled out another reversal in oil prices.

"You have this contrast between supply concerns related to Russia and demand issues related to weakening economies," he said. "It's going to be somewhat of a tug of war."

--

elizabeth.douglass@latimes.com

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