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ENERGY

Oil soars despite fundamentals; gasoline prices might follow

California gas prices fall below $3 a gallon, but oil is at its highest in more than a year -- even though supplies are plentiful, demand is weak and refiners have slashed production.

October 20, 2009|Ronald D. White

Until Monday, pump price expert Fred Rozell figured that California gasoline was headed down to $2.85 a gallon or lower. But that was before crude oil futures rose $1.08, or 1.3%, to settle at $79.61 -- their highest close in more than a year.

Now Rozell says all bets are off in spite of several fundamentals, such as the facts that oil supplies are plentiful, demand remains weak and refiners have slashed production because motorists aren't driving enough to allow gasoline makers much of a profit.

"You would think that this would drive the price of crude down, but what we have here is more of a financial play than market fundamentals. There is no reason for oil to be this high," said Rozell, retail pricing director of Oil Price Information Service in New Jersey. He added that the 10-week price slide that finally drove California gasoline back below $3 a gallon was probably over.

"If crude prices keep moving forward, the decline is going to stop," Rozell said.

Over the last week, the average price of a gallon of regular gasoline in California fell 2.7 cents to $2.998, the Energy Department said. California's average hadn't been below $3 a gallon since Aug. 3. Nationally, retail prices are already on the rise. The U.S. average jumped by its highest amount since Aug. 10, climbing 8.5 cents to $2.574 a gallon.

Phil Flynn, an analyst with PFGBest in Chicago, said gasoline prices would be driven by the run-up in oil, which he said could easily reach the $80- to $85-a-barrel range. Flynn blamed the weak U.S. dollar for driving more investment money into commodities such as oil. He added that the stock market's strength was helping to convince skeptics that the economic recovery was underway.

That was still no justification for oil to be close to $80 a barrel, said Fadel Gheit, senior energy analyst at Oppenheimer & Co. Gheit said Wall Street speculators were again driving up the price of oil futures under the assumption that the Obama administration was juggling too many other issues, such as the war in Afghanistan and healthcare reform, to devote serious time to pushing for tougher regulations on commodities trading.

"We still have an oil glut. We still have weak demand. More than half of the recent increase in oil is speculation and not supply-and-demand fundamentals," Gheit said. "People are brushing aside everything we learned last year from the collapse of the economy and oil prices."

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ron.white@latimes.com

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