Motorists who faced the new year with the highest-ever fuel prices during the holiday season may need to brace for another trip to $4-a-gallon gasoline territory this year.

"There is a good chance we will get up to $4 a gallon and it doesn't have a lot to do with gas, but it has everything to do with crude oil prices and the impact of uncertainty in the Middle East," said Andrew Reed, an analyst at Energy Security Analysis Inc., a Boston-area research and consulting firm.

Average gas prices in the region have increased 24 cents per gallon over the last month to $3.52, according to AAA's fuel-gauge report. Prices are up 7.3 percent over the last month and 11 percent over the last year, according to the motor club.

Regional gas prices hit an all-time high of $4.06 in July 2008, according to AAA.
Drivers who stopped for fuel at the Convenient Food Mart at Wyoming Avenue and Mulberry Street on Monday seemed resigned to high prices.

"I think we are learning to live with it," said Bill Guerin of West Pittston. "It's, of course, frustrating."
Dave Evans of Scranton filled a gas can with fuel and said he got rid of a sport utility vehicle 1½ years ago that got 15 miles per gallon and now drives a compact car that gets 27 miles per gallon. Foreign sources of oil for fuel add to uncertainty and high prices, he said.

"There's got to be a way we can get our own gas," he said.

A revolution in Libya, a major oil producer in North Africa, and uprisings in other Mideast nations in 2011 created market uncertainty, producing a ripple effect on gas prices, said Hamza Khan, an analyst at the Schork Report, a Montgomery County newsletter that tracks energy markets.

"The Middle Eastern turmoil is playing a heavy factor in this," Mr. Khan said. "In the summer driving season, $4 gas is definitely feasible."

Increasing tension between the United States and Iran, another major oil producer, add to upward pressure on gas prices, Mr. Reed said.

"The Arab Spring isn't over, and now we've got the confrontation with Iran that is really pushing up the uncertainty," he said.

Strong international demand for gas has propelled higher recent U.S. gas exports, Mr. Khan said. American companies are exporting an average of 2.8 million barrels of fuel products daily, up from the 1.3 million daily average from 2006 to 2011, he said.

"Our export products are at the highest level ever seen," he said.
Nevertheless, Americans spend only about 2.8 cents of each dollar of disposable income on gas, down from 4 cents in 2006, Mr. Khan said.

"We're being pressed," he said. "We are not being squeezed."

The Obama administration's decision Wednesday to reject a pipeline that would have carried crude from Canada’s tar sands deposits to Texas oil refineries isn’t likely to end investment in the carbon-rich fuel, industry analysts say.

In killing the controversial Keystone XL pipeline, President Obama blamed congressional Republicans, who he said “forced this decision” by requiring an expedited 60-day review of the pipeline as a provision of the recent payroll tax extension.

Obama also reaffirmed his support for domestic oil and gas exploration and expanding fossil fuel infrastructure. “In the months ahead, we will continue to look for new ways to partner with the oil and gas industry to increase our energy security,” he said.

But industry analysts question this rationale. “If your objective is improving our energy security, then Keystone should have been built,” said Sarah Emerson, president of Energy Security Analysis, Inc., an energy forecasting firm.

Environmentalists have reason to temper their excitement over the pipeline's defeat. They opposed pipeline builder TransCanada's project because of fears about spills and the climate-change implications of refining tar sands, which give off more carbon dixoide than traditional crude oil. But Obama threw his support behind additional U.S. drilling. And analysts say production of tar sands in Canada will continue.

“Is it a setback? Yes,” Emerson said. “Does it spell the end of the oil sands development? No.”
She predicts that America’s northern neighbor will go forward with a stalled pipeline to its Pacific coast. “I suspect that [Canada looks] at this as a rejection and they’ll say ‘OK, well, you don’t want our oil? We’ll sell it to China.’”

Investors in Canada’s tar sands, who had been closely following the Keystone battle, are not likely to pull out just yet. “I don’t know exactly what kind of message this sends, just because it’s an election year,” said Jacob Correll, a commodities analyst at Summit Energy, a consulting firm. “There’s still money to be made.”

Gasoline prices could spike high enough this summer to significantly rattle consumer confidence and further depress an already sluggish U.S. home sales market.

One major driver behind gasoline prices will be Iran, who threatens to retaliate against Western embargoes of its oil imports by closing the Strait of Hormuz, which allows for the passage of as many as 20 million barrels of crude oil a day on tankers. There is a roughly 96% positive correlation between gasoline and crude oil prices.
"Even the belief that there is a realistic chance that Iran could attempt to do so could send crude prices, and very quickly thereafter gasoline prices, spiraling upward," says Neal Walters, a partner in A.T. Kearney's energy practice.

Diane Swonk, Mesirow Financial's chief economist, says that retail gasoline prices at around $3.45 a gallon represents a "tipping point," where drivers curb their gasoline consumption and consumers make more trade-offs in their budgets. An event like the Iranian closure of a key waterway for transporting oil could send gasoline prices soaring above that mark and seriously tip the scale against the recovery in U.S. consumer confidence.
Tim Evans, Citi futures perspective energy analyst, says that retail gasoline prices could breach the $4 spike achieved in 2008, if Iran were to make any major moves of this nature.

"We are very concerned about the role that Arab Spring subsidies to stop revolts in countries with monarchies, and ... Iran could play beyond underlying demand," adds Swonk.

"If gasoline were to rise to around $4 a gallon by April or May, then I believe ... consumer spending would come in below trend, as disposable income gets squeezed," said Michael Feroli, JPMorgan's chief U.S. economist.
The shuttering of various European and U.S. northeast refinery operations of late due to unfavorable margins and a difficult lending environment could also eventually lead to supply-constraint driven gasoline price spikes when demand starts to pick up again towards the summer peak driving season period, say analysts.

"We should be aware that the import situation going forward is also going to take a big hit into this year," cautions Oil Outlooks and Opinions president Carl Larry. "Europe is fading fast and that should give [refineries] more reasons to slow refinery runs and see their demand come off. We'll not be able to get relief on normal gasoline imports during summer."

European refiner Petroplus recently decided to shut down operations at three of five of its refineries across Europe due to credit constraints. Meanwhile, U.S. northeast closures have or will be taking place at ConocoPhillips' 185,000 barrels-per-day Trainer, Pa. refinery and Sunoco's Marcus Hook and Philadelphia refineries in Pennsylvania, which combined had roughly 500,000 barrels a day of refining capacity.

Gluskin Sheff chief economist David Rosenberg worries that gasoline prices have stopped declining and now warns of "much more tepid" consumer spending going forward. The economist attributes December's improvement of consumer confidence to an eight-month high and retail sales surge of 4.7% year-over-year directly to a 70 cent slide in gasoline prices since late summer, which was enough to add $100 billion of cash flow into consumer pocketbooks. A spike in prices could, of course, have an equally negative effect.
Larry of Oil Outlooks and Opinions thinks that retail gasoline prices could jump to $3.80 in the summer from roughly $3.25 now. Meanwhile, looking at just the Northeast, Energy Security Analysis' president Sarah Emerson predicts an average, summer time high of roughly $3.60. A summer time spike would also be negative for the already fragile housing market.

"If gas prices peak in the spring or summer, that could hurt consumer confidence during the prime months for home buying," says Trulia chief economist Jed Kolko. Home sales tend to be highest around June.
Kolko adds that high gasoline prices would especially dissuade home buyers from purchasing in outer suburban areas, where commutes are longer. This could, in turn, hurt government plans to rent out foreclosed homes, as many of them are in outlying areas, the economist points out.

Rich Ilczyszyn, chief market strategist and founder of iiTRADER.com expects retail gasoline prices to average $3.90 this year.

Barring any major event from Iran, Trey Cowan, Rigzone's senior market research analyst, expects retail gasoline prices to average $3.50 or less during 2012, which is roughly a 2% decline from the previous year's prices, due to weaker demand; Citi Futures Perspective's Evans, would see retail prices closer to $3 than $4 when excluding Iran.

"If ... gas prices come down to $3 a gallon, then I think once again you could see the consumer do better in the second half, much as occurred in 2011," says Feroli of JPMorgan.

Predictions of easing gasoline prices are also being driven by views that there could be potential oil supply overhang concerns coming up in the absence of a strong and immediate message by the successor of Saudi King Abdullah, reinforcing the adherence to self-imposed production limits by OPEC (Organization of the Petroleum Exporting Countries) members. "Abdullah will be 88 years old in 2012 and the question of Saudi succession will likely need to be clarified relatively soon," Walters of A.T. Kearney says of the top oil-exporting nation.

The offsetting of refinery shutdowns in the Northeast by, for instance, the expansion of Motiva Enterprises -- a joint venture between Shell(RDS.A) and Saudi Refining -- of its Port Arthur, Texas refinery to 600,000 barrels a day, may also help prevent supply-constraint driven gasoline prices spikes.

Meanwhile, Harry Tchilinguirian, BNP Paribas' head of commodity markets strategy, says that lost European product output can be met by production by plants elsewhere in Europe; while other analysts say that during the summer, European imports may not make much of a difference on supply any way, as their conventional blends do not match the Environmental Protection Agency's summer blend requirements for some of the high demand areas of the U.S.

"A lot of people overreact, and they think this will be the year where there's not enough gasoline -- and you get these rallies," warns Tom Kloza, chief oil analyst at the Oil Price Information Service.

Oil dropped a third day as German industrial output declined, signaling that growth in Europe’s largest economy may have stalled, and as concern eased that Iran will block crude shipments from the Persian Gulf.

Futures fell 0.3 percent after Germany said production (GRIPIMOM) declined 0.6 percent in November. The probability of Iran closing the Strait of Hormuz is low and Saudi Arabia will probably raise oil output, Jefrfrey Currie, head of commodities research at Goldman Sachs Group Inc. (GS), said in London today.

“The European economy doesn’t look good and that’s going to hurt oil demand,” said Kyle Cooper, director of research with IAF Advisors in Houston. “Although the U.S. economy is performing better, petroleum demand isn’t looking good.”

Oil for February delivery fell 25 cents to $101.31 a barrel on the New York Mercantile Exchange, the lowest settlement of 2012. Futures are up 15 percent in the past year.

Brent oil for February settlement decreased 61 cents, or 0.5 percent, to end the session at $112.45 a barrel on the London-based ICE Futures Eurrope exchange. The European contract’s premium to Nymex crude narrowed to $11.14 a barrel today. The spread surged to a record high of $27.88 on Oct. 14.

German manufacturing was projected to slip 0.5 percent, according to the median of 30 estimates by analysts in a Bloomberg News survey (GRIPIMOM).

The International Monetary Fund will probably cut its forecast for global growth, Managing Director Christine Lagarde said Jan. 6. German growth will slow to 0.6 percent in 2012 from 3 percent last year before recovering to 1.8 percent in 2013, the Bundesbank predicted on Dec. 19.

Berlin Conference

German Chancellor Angela Merkel and French President Nicolas Sarkozy outlined the increased pace of their response to the financial crisis. Merkel and Sarkozy said euro-area leaders may complete their new budget rulebook by Jan. 30, one month ahead of schedule, and are considering accelerating capital contributions to the bailout fund being set up this year.

The situation regarding Iran is bearish for the price of crude oil, Goldman’s Currie said. Europe will turn to Saudi Arabia to replace supplies from Iran, whose exports will go to China, where demand is quite strong, Currie said at a conference in London today.

“Geopolitics have trumped market fundamentals lately,” said Rick Mueller, a principal with ESAI Energy LLC in Wakefield, Massachusetts. “Prices will fall a great deal when the Iran situation calms down.”
A halt of shipping through the strait might send the price of Brent as high as $200 a barrel for a limited period, according to Societe Generale SA. (GLE)

The waterway carries 17 million barrels of oil a day, according to the U.S. Energy Department, almost 20 percent of global consumption.

Pipeline Delay

A pipeline that would allow oil from the United Arab Emirates to bypass the Strait of Hrormuz has been delayed by construction difficulties, two people with knowledge of the matter said. Abu Dhabi, holder of most of the U.A.E.’s crude reserves, had planned to start exports in January 2011 through the pipeline to a port outside the strait, Dieter Blauberg, the project’s former director, said in May 2009.

“It’s unfortunate that the pipeline that would allow Abu Dhabi oil to avoid the strait has been delayed,” said Chris Faulkner, president of Breitling Oil & Gas in Irving, Texas, an independent producer focused on North America. “If there were a move by Iran to close the strait the move would be significant. Prices would climb $20 to $30 in 15 minutes.”

U.S. Economy

Last week the U.S. Labor Department reported the economy added 200,000 jobs in December and the unemployment rate fell to 8.5 percent. Fuel demand dropped fell 2.6 percent to 18 million barrels a day in the week ended Dec. 30, down 5.7 percent from a year earlier, according to the Energy Department.

“U.S. economic prospects have looked brighter lately but that hasn’t been reflected in the weekly numbers,” Mueller said. “There will be a lot more supply in 2012, with non-OPEC producers such as the U.S. and Brazil increasing output and Libya recovering faster than anyone forecast.”

Oil supply from non-OPEC producers will advance 1.9 percent to an average of 53.68 million barrels a day this year, an International Energy Agency report on Dec. 13 showed. Libyan output (OPCRLIBY) rose 100,000 barrels to 700,000 a day last month, the highest level since February, according to a Bloomberg News survey of oil companies, producers and analysts.

Hedge funds increased bullish positions on oil by 4.1 percent in the week ended Jan. 3, according to the Commodity Futures Trading Commission’s Commitments of Traders report. Open interest advanced 3.5 percent, rising for a second week after falling in December to the lowest since May 2007, according to the CFTC.

Oil volume in electronic trading on the Nymex was 582,951 contracts as of 3:21 p.m. in New York. Volume totaled 612,945 contracts Jan. 6, 1.3 percent above the three-month average. Open interest was 1.4 million contracts, the highest level since Nov. 11.

Crude oil prices will continue to be volatile in the new year, making it harder for airlines to plan fuel expenditures due to global macroeconomic forces, industry analysts say.

“Structurally, we’re in an era where some level of volatility is here to stay relative to what we had in the 1990s,” says John Heimlich, Airlines for America chief economist. The price of the benchmark West Texas Intermediate oil swung by more than $10 in the space of 10 days in December, to $93 per barrel from more than $100. “Those aren’t movements we would have seen in a year—let alone a week—10 years ago,” says Heimlich.

Volatility may not be the new normal, but it is probably here to stay for the next year, says Sarah Emerson, president of ESAI, an energy consultancy. Three macroeconomic factors are driving this volatility. The first is the unfolding story in the Middle East. Libya is still restive, and Iraqi production has not fully come back online.

Second, the European debt crisis may result in a recession on the continent. And the U.S. economy is continuing its slow recovery. Both of these factors—whether Europe will tip into recession or whether the U.S. will continue to grow—remain uncertain, further fueling oil price volatility, says Emerson.

Third, China’s economy is showing signs of cooling. The government is tightening credit and attempting to stimulate domestic demand. Investors are uncertain where Chinese oil demand will go, and this is causing further volatility. “None of these three economic stories has been resolved,” says Emerson. “If it becomes clear that the economic stories have stabilized, investors will return to the fundamentals of supply and demand [of oil].”

“When the cost of operation goes up, it does put downward pressure on capacity, especially if the revenue environment is not keeping pace, and that’s a question mark,” says Heimlich. Advance bookings are holding up, relative to capacity, he notes.

However, U.S. carriers are continuing to pull capacity out of the system. After growing for the first three quarters of the year, capacity in the fourth quarter is down, and the first quarter of 2012 will be down 1.1% compared with the first quarter of 2011, says Heimlich.

This is borne out by oil consumption, he notes. After reaching a high of 54 million gallons of jet fuel per day in 2007, fuel consumption dropped in the first 10 months of 2011 to 48.6 million gallons. This is up from 2010’s average of 47.4 million gallons per day. Although some of that reduction comes from mothballing older, less efficient aircraft and the addition of new aircraft, most of it is due to the “schedule mix,” says Heimlich.

Because the price difference between West Texas Intermediate crude oil and jet fuel remains stubbornly high, refiners of WTI in the U.S. Midwest are making hay while the sun shines. And this is bad news for airlines because this price difference, known as the crack spread, is expected to persist for the next few years.

The price of jet fuel more closely tracks the European Brent crude oil benchmark. On Oct. 1, for example, the price of jet fuel was $125.87 per barrel, while WTI was $86.40 and Brent was $111.82, says Sarah Emerson, president of ESAI, an energy research and forecasting company based in Massachusetts. The $39 spread between jet fuel and WTI is anomalous, she says. “Midcontinent refiners are making a lot more money than everyone else.”

These refiners are able to charge what the market will bear for jet fuel, even though the price of the crude oil they use is trading $20-30 less than the crude oil used by refiners elsewhere in the world.

The reason that prices for WTI remain depressed is both complex and startlingly simple. The simple, and primary, reason is that crude oil is piling up in Cushing, Okla., where WTI is priced, due to logistical constraints. Oil from Canada and the Midwest U.S. is ferried by pipeline to Cushing and has no place to go. “There is more oil than we know what to do with in the mid-continent right now,” says Adam Sieminski, Deutsche Bank chief energy economist.

The Keystone XL pipeline, construction of which is currently stalled due to regulatory issues, would solve some of this, Sieminski says, by draining up to 500,000 barrels per day from Cushing to Gulf Coast refiners. But until then, there is a shortage of rail cars, barges and truck drivers to transport the oil away from Cushing, he says.

Second, WTI is best refined into gasoline. But Brent is better suited to be refined into “middle-distillates,” which include jet fuel, diesel and heating oil. Demand for these products is high in Asia, which partially explains Brent's premium over WTI. “Brent probably deserves a premium over WTI for this reason,” says Sieminski.
Meanwhile, the price of Brent is artificially high because the conflict in Libya took a significant source of light sweet crude offline. Also, several fields in the North Sea were down for unforeseen maintenance, and both these factors pushed the price of Brent up, Sieminski says.

The $13-15 crack spread between Brent and jet fuel is more in line with historical averages than that between WTI and jet fuel. Crude oil prices fluctuate not only from supply and demand but also from external shocks, such as the Greek debt crisis and conflict in oil-producing regions, says John Heimlich, Air Transport Association chief economist.

But jet fuel prices—like all transportation fuels—respond to supply and demand, says Emerson. So for refiners in the mid-continent, the high price of jet fuel and the low price of WTI is a bonanza, offering refining margins much higher than the $7-8 per barrel usually seen. “Refiners are charging what the market will bear,” says Heimlich.

At the same time, most East Coast refiners use light sweet crude and are now competing for these scarcer resources with European refiners, says Emerson. And Heimlich adds that two large refineries in the East Coast are slated to close, which will put further upward pressure on jet fuel prices.

On top of these constraints, refiners are unlikely to increase output of jet fuel. Diesel, gasoline and other refined products make up the bulk of refineries’ output, while jet fuel usually accounts for just 6-7% of output, says Emerson. In other words, demand for gasoline and diesel often drives refineries' decisions.

The situation is unlikely to change anytime soon, says Sieminski. “Brent and WTI may come to equilibrium by 2015,” he says, with the caveat that this can only occur if more pipeline capacity is added to Cushing. “Products such as transportation fuels are better tied to the Brent benchmark than WTI.”

Consumption of natural gas for heating in the first quarter may be the lowest since 2006, WSI said in its latest seasonal outlook.

Heating demand is expected to be 5.4 percent lower than a year earlier, even as below-normal temperatures blanket most of the northern and western U.S., Todd Crawford, WSI’s chief meteorologist, said in a statement.
Temperatures will be lower than normal from north of El Paso, Texas, to northern Virginia, with the coldest weather from northern Oregon to northern Wisconsin, according to WSI, based in Andover, Massachusetts.
The region from Texas to southern Virginia will see above- normal temperatures, with Florida expected to be warmest.

“Natural gas inventories are likely to experience significant draw-downs in January as a result of higher heating demand, although possibly less than in previous years,” said Paul Flemming, director of the analysis firm Energy Security Analysis Inc. in Wakefield, Massachusetts, which works with WSI.

Milder weather will soften demand in February, he said in the statement. Colder weather may return in March, although “bullish expectations for natural gas prices may be limited.”

US energy consultant ESAI has released a study, Global Oil Trends 2012-2013, focusing on the impact of seven trends on the world oil markets in 2012 and 2013.

These include refining capacity expansion, rising caution towards nuclear energy, tighter regulations on shipping carbon emissions, a slowdown in the supply and demand of alternative fuels, growth in the petrochemicals industry, the continuing boom in non-conventional oil and gas, and the struggle to reform the financial sector.

A press release issued by the Wakefield, Massachusetts company did not mention if the study had considered the impact of geopolitical developments and military conflicts on global oil flows.

ESAI said the reduction in refining capacity along the US East coast will weaken the light sweet crude premium and enlarge the market for European gasoline exports, which in turn will reorient global gasoline flows.

“The addition of almost three million b/d of refining capacity in 2012 and 2013, half of which is in Asia, will keep the region long some petroleum products despite healthy demand growth.

“The addition of 1.2 million b/d of coking and hydro-cracking capacity will contribute to the volume of clean light products, and destroy fuel oil, especially in the Atlantic Basin. This will narrow the ultra-low sulphur diesel vs high sulphur fuel oil spread.

“Refining capacity expansions will redraw the global diesel trade map. For example, the US will export more, Europe is likely to import less. Brazil will import more. China may end up importing.”

ESAI said countries will hesitate to expand the use of nuclear power, preferring to use fuel oil. It predicts that by end-2013 it will be clear just how many countries will reconsider the role of nuclear power in their energy mix.

The study expects stricter shipping emissions controls to boost demand for low sulphur fuel oil, and encourage marine diesel on the margin of the bunker market.

ESAI expects a slowdown in the growth of the biofuels industry. Ethanol and bio-diesel have penetrated the transport fuels markets at a steady clip over the last few years, but will be affected by the limitations of existing mandates and the absence of second generation bio-fuels.

While vehicle technologies will proliferate due to better fuel economy in the US and China, ESAI said this trend will have only a marginal impact on gasoline demand.

The study sees a bright future for natural gas-based liquid fuels due to the price advantage of natural gas in some regions.

Petrochemicals consumption could be affected by the inability of China’s refineries to produce enough light naphtha feedstock. On the other hand, ESAI sees India becoming a bigger supplier to the rest of Asia.

“While it’s not clear that India’s surplus will meet China’s deficit directly, India’s supplies to other Asian countries will undoubtedly divert other supply to China,” said ESAI.

The study predicts the US and Canada emerging as key areas of growth in non-OPEC production.

The US will benefit from the growth in shale oil output, with the Bakken and other basins contributing to crude supply increase of more than 200,000 b/d. Canada’s oil sands will add at least another 300,000 b/d to non-OPEC production.

ESAI predicts that financial reforms and regulations will have “some limited impact” on open interest in the futures markets. It pinpoints the exemptions for non-commercials and swap dealers to dictate the magnitude of the impact of this new regulation on the global oil markets.

Gasoline declined after the Energy Department reported that stockpiles of the motor fuel rose the most since January last week and demand fell.

Futures sank as inventories jumped 5.15 million barrels to 215 million, the highest level since July 29. Analysts projected a gain of 875,000 barrels, according to the median estimate of 12 analysts in a survey by Bloomberg News. Demand, or deliveries to wholesalers, fell 2.2 percent to 8.57 million barrels a day, the lowest level in five weeks.

“A 5 million-barrel build in the middle of winter is bearish by any measure,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts.

Gasoline for January delivery fell 4.99 cents, or 1.9 percent, to $2.5955 a gallon at 11:12 a.m. on the New York Mercantile Exchange, from $2.6551 before the report was released at 10:30 a.m. in Washington. Futures have advanced 5.8 percent this year.

Measured on a four-week average, demand was 3.5 percent below a year earlier. Gasoline production fell 0.7 percent to 9.13 million barrels a day.

“Production down, demand down and inventories up, this is very bearish for gasoline,” Cohan said.
Lower Demand

Demand at the pump last week fell below a year earlier for the 14th consecutive time last week, down 4 percent from 2010 levels, according to MasterCard Inc.’s SpendingPulse report yesterday. Measured on a four-week average, consumption was 4.2 percent below a year earlier, the 37th consecutive decline in that measure.

“Gasoline is continuing its trend with lower demand and we’ve seen that throughout 2011,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Stockpiles of heating oil and diesel rose 2.53 million barrels last week to 141 million, a five-week high. Demand surged 21 percent to 3.92 million barrels a day, after falling the prior week to the lowest level since August 2009. On a four- week average, consumption was 3.4 percent higher than a year earlier.

January-delivery heating oil declined 2.84 cents, or 0.9 percent, to $2.9933 a gallon. Prices have gained 18 percent this year and peaked at $3.3197 on April 8.

Regular gasoline at the pump, averaged nationwide, rose 1.1 cent to $3.286 a gallon yesterday, according to AAA data.

After a decade of wrangling, new clean-air rules are slated to come into effect in the new year, upending the coal market.

U.S. environmental regulations will force power plants to reduce pollution as of Jan. 1. Although the industry is waging an effort to stop the rule's implementation across 27 states, power plants already are ratcheting back purchases of thermal coal, which produces smog and soot-causing emissions as it is burned to produce electricity, in favor of cleaner fuels.

That has sent prices of thermal coal plummeting 13% on the New York Mercantile Exchange between the day the rule was announced on July 7 and last week's one-year lows. While trading is relatively thin, it is used as a proxy for the billion-dollar cash market on the East Coast, where physical coal changes hands. On Friday, central Appalachian coal fell 18 cents, or 0.3%, to $69.07 a short ton.

Investors who want exposure to coal prices typically invest in coal-miner stocks. Some market watchers have urged investors to shift toward the types of coal used in steelmaking, known as metallurgical coal, or "met," which trade at a higher price and has more exposure to China's steel sector, an expanding market.

"We came out with a preference for met; the basic reason in our view is that prices are more likely to rebound than thermal," said David Gagliano, an analyst with Barclays Capital.

But investors, he said, still are banking on a rebound in thermal coal, and consequently some coal producers.
Although U.S. policy makers are turning away from thermal coal, which is mined in places like West Virginia and Wyoming, coal continues to hold significant sway in U.S. and global energy markets. The U.S. is home to the world's largest reserves of the fuel, and $33 billion of thermal coal is expected to be produced this year based on current market prices, according to Brean Murray, Carret & Co., an investment bank.

The gradual shift toward cleaner power, and falling coal prices, is forcing coal producers to seek markets elsewhere. That is likely to push investors toward coal companies that have access to export capacity.

Analysts and brokers see reasons for steady or higher coal prices in the form of demand from Asia; China and India are building coal-fired power plants at a furious pace. The U.S. long has been a net exporter of coal, but its share of the export market is rising as coal originally mined for domestic use is shipped abroad.

"What we lose in domestic demand [from emissions regulations] we'll probably gain in exports," said Daniel Vaughn, director of coal services with brokerage ICAP United.

Historically, Europe has relied on South Africa for imports, but higher prices in Asia have pulled that coal away, leaving the U.S. to fill the gap.

U.S. miners have been exporting coal, including thermal coal, at a near-record pace this year. Arch Coal Inc., the No. 2 U.S. miner by production, projects that U.S. exports will reach 106 million tons this year, the highest since 1991, and could increase again in 2012 as port expansions and rail terminals are completed.

That may help bolster domestic coal prices in the long term, analysts said. As more coal heads offshore, the decline in available U.S. supply will bring prices higher, they said. And brokers said U.S. coal prices are likely to find support early next year as U.S. utilities run down coal inventories and are forced to return to the market.
Another wild card in coal prices is its cleaner-burning cousin: natural gas, which has taken coal's market share in the U.S. over the years. Natural-gas prices have been in a slump for three years due to booming production.

Because utilities have some ability to switch between the two, competition between the fuels keeps prices of both in check.

In the U.S., coal's market share was 51% in 2000 and 44% last year. Natural gas's share was 15% in 2000 and 24% in 2010.

The new emissions standards likely will push utilities to natural gas. In the short term, the market will be able to absorb the additional demand without a significant rise in prices, but some said natural-gas prices eventually will climb as well.

On Friday, natural-gas prices declined 6.4 cents, or 1.8%, to $3.584 a million British thermal units.
"I don't think that the natural-gas market has priced in" the new rule, said Chris Kostas, senior gas and power analyst with Energy Security Analysis Inc., a consultancy.

Gasoline rose to a two-week high after central banks led by the Federal Reserve cut emergency dollar funding costs to European banks to ease the region’s debt crisis and as the U.S. added jobs.

Prices gained as the central banks’ move boosted equities and the dollar fell, increasing the investment appeal of commodities. U.S. companies added 206,000 workers in November, reducing concern that unemployment will remain elevated, curbing fuel use. The Energy Department reported that gasoline demand climbed last week.

“The bigger impact was the coordinated action of the central banks to reduce the dollar lending rates, sending stocks higher and oil prices with it,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. “Underpinning that is an increase in the amount of jobs that were created.”

Gasoline for December delivery gained 2.86 cents, or 1.1 percent, to settle at $2.5677 a gallon on the New York Mercantile Exchange. Prices fell 2.8 percent this month.

The more-actively traded January contract advanced 1.86 cents, or 0.7 percent, to $2.5584 a gallon. December gasoline and heating oil contracts expired today.

Gasoline demand, or deliveries to wholesalers, rose 2.1 percent in the week ended Nov. 25 to 8.77 million barrels a day, the most since the week ended Oct. 7, today’s report showed. Gasoline production fell 3 percent to 9.19 million barrels a day. Inventories increased 213,000 barrels.

“It was Thanksgiving week and people were driving,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. “Production cutting back is bullish.”

Central Banks

The central banks of the U.S., the euro region, Canada, the U.K., Japan and Switzerland agreed to cut the cost of providing dollar funding via swap arrangements, the Federal Reserve said in a statement.

Futures rose a third consecutive day after the banks’ move, which is aimed at easing financial market strains and boosting the central banks’ capacity to support the global financial system, the statement said.
“It was extremely bold,” said Phil Flynn, vice president of research at PFGBest in Chicago. The euro gained 0.9 percent against the dollar at 2:49 p.m. in New York while the Standard & Poor’s 500 Index added 3.2 percent.

“The market likes the news because it’s a glimmer of good news in a torrential downpour of bad news. But it’s done for a reason and the reason they did it is not good,” said Ray Carbone, president of Paramount Options Inc. in New York.

Jobs Increase

The 206,000 increase in jobs was the biggest this year and followed a revised 130,000 gain in October, ADP Employer Services said today. Planned firings dropped 13 percent to 42,474 from November 2010, according to figures released today by Chicago-based Challenger, Gray & Christmas Inc.

The jobs reports are “constructive, optimistic kind of news and that helped the rally,” Carbone said.
In other economic news, the Institute for Supply Management-Chicago Inc.’s business barometer rose to 62.6 in November from 58.4 the prior month as orders and production strengthened. The National Association of Realtors’ index of pending home sales increased 10.4 percent, the biggest gain since November 2010.

The Federal Reserve, in its Beige Book survey, said the economy expanded at a “moderate” pace in 11 of 12 districts, led by gains in manufacturing and consumer spending. Only the St. Louis district reported a decline in economic activity.

“From almost every angle, the economy looks pretty good,” said James Cordier, portfolio manager at OptionSellers.com in Tampa, Florida.

Supplies Increase

Heating oil pared gains after the Energy Department reported that distillate stockpiles surged 5.53 million barrels last week to 138.5 million, the biggest gain since January 2009. Demand plunged 20 percent to 3.24 million barrels a day, the lowest level since August 2009.

“The inventory data was not supportive and that gave pause to the idea that distillate inventories are one of the underpinnings of the rally,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut.

Refiners increased heating oil and diesel fuel production 1.2 percent to a record 4.83 million barrels a day. Exports remained at a record high 948,000 barrels a day, based on preliminary weekly reports.
The market “thinks this is bearish, but we had a great Thanksgiving shopping season and export demand is really strong,” Cohan said.

December-delivery heating oil rose 0.03 cent to settle at $3.0214 a gallon, after touching $3.0536 before the inventory report’s 10:30 a.m. release in Washington. Prices fell 0.7 percent this month. The January contract slipped 0.85 cent to $3.0251.

Regular gasoline at the pump, averaged nationwide, was unchanged at $3.295 a gallon yesterday, according to AAA data.

Natural gas futures traded lower Wednesday, giving back most of the previous day's gains, ahead of a government survey expected to show gas inventories again climbing to a new record.

Natural gas for January delivery settled down 8.3 cents, or 2.3%, to $3.550 a million British thermal units on the New York Mercantile Exchange.

The Department of Energy is due to report its closely watched survey of U.S. natural gas in storage Thursday at 10:30 a.m. EST. Analysts on average expect a build of 10 billion cubic feet, which would bring inventory levels to 3.862 trillion cubic feet, a fresh record.

Typically this time of year, natural gas inventories decline, as the cooling weather triggers gas-fired heating demand. But the natural gas market has been weighted by an extended "shoulder season"--the period of sluggish demand between the summer cooling and winter heating seasons--as the mild autumn weather delays the onset of significant heating needs.

"This has been an extraordinarily mild autumn," said Chris Kostas, analyst with Energy Security Analysis Inc. "Heating demand is virtually nil throughout the Northeast and has been for quite some time."

"I'm not surprised at (prices near) $3.50 taking into account how mild this fall has been," he added.
If the build comes in as expected, gas inventories will be 7.6% above the five-year average for this time of near, and 1.4% above last year's figure for this period. Thursday's expected injection is likely to be the final increase of gas in storage for the season, Gelber & Associates said in a research report.

Elevated inventories coupled with weak demand and soaring production have battered gas prices over the last several months. Front-month futures haven't traded above the $4/MMBtu threshold since mid-September, and continue to recover from a one-year low of $3.285/MMBtu last reached Nov. 21.

Weather forecasts offer few signs demand will pick up meaningfully anytime soon. MDA EarthSat said it continues to expect average temperatures across most of the U.S. in its 11-to-15-day report.

On Tuesday, the Department of Energy said gas output in the lower 48 states rose 1.1% to a record 70.4 bcf per day in August.

"Although colder temperatures are on their way, supply remains strong as an ox," said Matt Smith, analyst at Summit Energy in Louisville, Ky.

Plans to reverse the Seaway pipeline may significantly cut the glut of oil inventories in the U.S. interior, but that will only whet the appetite of thirsty Gulf Coast refiners.

Experts say more pipelines will be needed along the same route to bring North America's growing oil bounty to where the continent's biggest fuel makers are.

"There's a large demand for oil on the Gulf Coast -- one pipeline is not going to do it," said Bill Day, spokesman for Valero Energy Corp. (VLO), the largest U.S. independent refiner.

Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) said Wednesday they will reverse and expand the 669-mile-long Freeport, Texas-to-Cushing, Okla., Seaway line so it can carry up to 400,000 barrels-a-day of crude oil to the Gulf Coast by early 2013. The move would help relieve a bottleneck that has kept growinginventories of crude stuck in storage tanks at Cushing and allow some of that locked up crude to reach the Gulf Coast, home to half of U.S. refining capacity.

But those 400,000 extra daily barrels are a drop in an ocean. Gulf Coast refineries process 7.5 million barrels of oil a day, two-third of which comes from imports, according to the U.S. Energy Information Administration. That's a huge gap for new production from oil fields in North Dakota, West Texas, Colorado and Alberta to fill, and more pipelines will be needed to move all that production, said Sarah Emerson, principal at energy consultancy ESAI Inc.

U.S. oil production is expected to grow from to 6.4 million barrels a day by 2016 from 4.2 million barrels a day today, according to data provided by Bentek Energy, a consultancy. And oil producers in western Canada are expected to ratchet up production to 3.5 million barrels a day by 2015 from 2.8 million in 2010, according to the Canadian Association of Petroleum Producers.

"I don't think Seaway is the end of it," Emerson said.

With fuel demand expected to grow in the short term as the U.S. economy revives and exports to Europe and Latin America rise, there's room for at least one more major pipeline to bring North American oil to the Gulf Coast, Valero's Day said.

Which pipelines gets built is now an open question, however. Reversing Seaway killed Enterprise's plans for an 800,000 barrel-a-day Wrangler pipeline, and it also caused some analysts to question whether it would impede TransCanada Corp.'s (TRP, TRP.T) controversial plans to expand its Keystone pipeline.

The $7-billion expansion, dubbed Keystone XL, would bring up hundreds of thousands of barrels of heavy Canadian crude oil down to Texas and Louisiana. The cross-border project is currently delayed for up to 18 months as it awaits it awaits approval from the U.S. State Department, during which time some customers could flock to Seaway, which can move both heavy and light crudes.

But in the long run, as Canadian oil production increases and demand for U.S. fuel at home and abroad grows, Keystone XL should get built, said Carl Kirst, analyst at BMO Capital Markets.

Keystone makes sense because it fulfills a need for heavy crude, which is cheaper than light crude, and therefore more profitable to refine. Refiners along the Gulf Coast and in the Midwest have spent billions to upgrade their equipment to handle this type of crude.

Canadian oil producers have threatened to ship the oil to Asia because of U.S. political uncertainty, but the lack of a major pipeline to the country's west coast will make the U.S. the customer of choice for the short term, analysts have said.

Meanwhile, Magellan Midstream Partners LP (MMP) still plans to reverse its 700-mile Houston-to-El Paso Longhorn pipeline to deliver up to 225,000 barrels a day of crude oil from west Texas to the Houston by mid-2013, said company spokesman Bruce Heine.

Seaway could also be expanded. Enbridge and Enterprise expect to start gauging interest in the first quarter of 2012 for building a new line of as-of-yet unspecified size to run parallel to the current Seaway, Enterprise spokesman Rick Rainey said.

"Based on level of shipper interest, we could loop the pipeline," Rainey said, using the industry term for adding a parallel line.

Oil fell below $100 a barrel as rising bond yields in Spain and France heightened concern that Europe’s crisis is spreading and as U.S. equities declined.

Futures dropped 3.7 percent as Spain’s borrowing costs surged to a euro-era record and French bonds’ spread to Germany’s widened. Oil extended losses in afternoon trading as U.S. stocks fell, sending the Standard & Poor’s 500 Index down for a second day.

“There is a lot of uncertainty about what’s going to happen with the euro in general and that certainly makes folks concerned about potential recession in Europe,” said Rick Mueller, a principal with ESAI Energy LLC in Wakefield, Massachusetts. “The fundamental picture really did not look that bullish.”

Crude for December delivery fell $3.77 to settle at $98.82 a barrel on the New York Mercantile Exchange. The contract expires tomorrow. The January contract, which traded at more than twice the December volume, fell 3.6 percent to $98.93.

Oil ended at $102.59 yesterday, the highest price since May 31, after Enbridge Inc. (ENB) and Enterprise Products Partners LP (EPD) said they will reverse the direction of the Seaway pipeline, adding an outlet to transport oil from the central U.S. and Canada to the coast of the Gulf of Mexico.

The pipeline reversal may ease a bottleneck at the Cushing, Oklahoma, storage hub that has lowered the price of benchmark West Texas Intermediate against other oils.

Brent Premium Shrinking

Brent oil for January settlement fell $3.66, or 3.3 percent, to $108.22 a barrel on the London-based ICE Futures Europe exchange. Brent’s premium to West Texas Intermediate, the New York benchmark, widened 1 cent to $9.29, down from a record $27.88 on Oct. 14 and from $13.02 on Nov. 15, the day before the Seaway reversal announcement.

Goldman Sachs Group Inc. said Brent’s premium to WTI will shrink to $6.50 a barrel sooner than it had estimated, citing the reversal. The spread will narrow to that level in six months, half the time the bank forecast previously, David Greely, a New York-based managing director, said in an e-mailed report.

Spanish bonds sank today, driving 10-year yields to 6.75 percent, the highest since before the euro was introduced, as borrowing costs climbed to the most in at least seven years at an auction of securities. Spanish Finance Minister Elena Salgado said today the economy will grow about 0.8 percent this year, less than the government’s target.

In France, the extra yield, or spread, that investors receive for holding 10-year French debt instead of benchmark German bunds reached 2 percentage points for the first time in the shared currency’s history as the country sold 6.98 billion euros of notes.

‘Weakening Outlook’

“We expect the euro zone to get into recession next year,” said Eugen Weinberg, head of commodities research at Commerzbank AG in Frankfurt. “I don’t think prices fully reflect the weakening outlook for Europe.”
The European Central Bank bought Italian debt today as part of efforts to halt the debt crisis.
The European Union accounted for 16 percent of world oil demand in 2010, according to BP Plc’s annual Statistical Review of World Energy.

“There is definitely some underlying concern about Europe and that’s providing resistance to oil prices,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “You are seeing some profit-taking today.”

Equities Decline

Oil also declined as U.S. stocks fell for a second day. The S&P index and the Dow Jones Industrial Average both fell more than 1.5 percent as of 3:45 p.m. New York time. The Standard & Poor’s GSCI Index of 24 raw materials declined 2.9 percent to 653.60.

Oil pared losses in earlier trading as U.S. economic data signaled growth. Applications for jobless benefits decreased 5,000 in the week ended Nov. 12 to 388,000, the lowest level since April, and housing construction permits climbed to the highest level since March 2010, U.S. government data showed.

“The economic numbers were really positive,” said Carl Larry, president of Oil Outlooks & Opinions LLC in New York. “If we didn’t rally to $103 yesterday, we would have rallied to $103 today.”

The U.S. is the world’s largest oil consumer, using 19.1 million barrels a day in 2010, or 21 percent of global demand, according to BP Statistical Review.

Oil volume in electronic trading on the Nymex was 787,140 contracts as of 2:46 p.m. in New York. Volume totaled 1.22 million contracts yesterday, 81 percent higher than the three- month average. Open interest was

1.35 million contracts.

Oil markets celebrated the news that the Seaway pipeline would be reversed by sending U.S. crude prices over $102 a barrel Wednesday.

But Midwest refiners like Valero Corp. (VLO), Marathon Petroleum Corp. (MPC) and HollyFrontier Corp. (HFC) will feel it on their balance sheets, analysts said. The pipeline may undermine some profitable operating margins that the refiners have enjoyed for most of the year.

Canada's Enbridge Inc. (ENB, ENB.T) announced it will buy a 50% stake in the Seaway Crude Pipeline from ConocoPhillips (COP) for $1.15 billion. Along with Enterprise Products Partners LP (EPD), the pipeline's other 50% owner, Enbridge plans to reverse the pipeline so that it will carry crude from the oil hub in Cushing, Okla., to the U.S. Gulf Coast.

The project will help relieve a bottleneck of crude that had developed in Cushing because of the limited options in transporting it from the hub. At the same time, the pipeline will make that crude available to the Gulf's refining complexes.

The glut of oil had depressed prices for the U.S. oil benchmark, West Texas Intermediate. Midwest refiners took advantage of those lower prices because their nearby facilities had access to the Cushing crude.

"Reversing this pipeline means that the crude that was basically trapped in the Midwest can get out of there," said Phil Weiss, an analyst with Argus Research. "Once it gets out, oil producers will be able to sell their crude at a much higher price because they will have access to many more refineries."

The relieving of the glut means the Midwest refiners not only face higher costs for the crude they process, but also lower prices for the products they produce.

The bottleneck lowered prices to the point this year where WTI became distorted as a benchmark for pricing other oil products. The industry turned to WTI's more expensive rival European rival benchmark, Brent crude futures, for determining the price for finished oil products. At the same time, the price difference between Brent and WTI soared to $27.89 on Oct. 14 as Brent prices rose due to oil disruptions from Libya and the North Sea.
That spread has been coming inward as supplies have declined at Cushing, but news of a new pipeline to carry away Cushing crude has closed that gap by another $3.74 to $9.29 at Wednesday's close.

For much of this year, Midwest refiners had the advantage of paying low prices for WTI and selling finished products based on Brent. They now are seeing WTI prices climb and the price gap to Brent diminish.
"This will inevitably put refiners in a squeeze," said Sander Cohan, analyst at energy consulting company ESAI Inc.

Shares of Valero, the largest independent U.S. refiner, were recently trading 6.95% lower at $23.15, while Marathon Petroleum's shares were down 6.25% at $34.65. HollyFrontier's shares slipped 6% to $25.92.
Valero declined to comment specifically on the Seaway pipeline reversal. But spokesman Bill Day said the company had told investors that it didn't expect the price difference between WTI and Brent to remain at record levels indefinitely. The company knew that the spread "would eventually narrow," but believes there is likely to be some differential between WTI and Brent over the long term, the company said.

Marathon Petroleum declined to comment. HollyFrontier didn't respond to requests for comment.
The crunch on Midwestern refiners also comes at a time when they are limited in their ability to preserve margins by raising prices due to weak gasoline demand. Refiners will have to pay more for their raw materials just as gasoline prices are stuck in neutral.

Gasoline sales for the week ended Nov. 11 was already down 4.4% from the same week last year, according to MasterCard Advisor's Spending Plus survey of gasoline sales. With U.S. unemployment at 9%, analysts expect gasoline demand to remain low.

Oil reversed losses in New York after the US Energy Department reported an unexpected decline in crude inventories and tumbling fuel stockpiles.

Futures rebounded from a 2.3 per cent drop as the DOE report showed a 1.37 million-barrel supply decline last week. Stockpiles were forecast to grow 500,000 barrels, according to the median of 13 analyst estimates in a Bloomberg News survey. Fuel inventories fell more than analysts projected. Oil dropped along with the euro and stocks earlier as turmoil in Italy bolstered concern that Europe's debt crisis will spread.

"The inventory numbers pulled the oil market higher," said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. "Until the release of the report, oil was being dragged lower by concerns about Europe and what they would mean for the global economy."

Crude oil for December delivery rose 17 cents to $US96.97 a barrel at 1:40 p.m. on the New York Mercantile Exchange. Futures dropped to $US94.54 and then climbed to $US97.84, the highest intraday price since Aug. 1. Oil traded at $US94.84 before the release of the report at 10:30 a.m. in Washington.

Brent oil for December settlement declined $US1.20, or 1 per cent, to $US113.80 a barrel on the London-based ICE Futures Europe exchange.

Oil trading volume in New York was 552,218 contracts. Volume has trailed the three-month average of 682,000 contracts since MF Global Holdings Ltd. filed for bankruptcy on Oct. 31. Volume tumbled to 381,435 on Oct. 31, the lowest level since April 29.

Fuel Stockpiles

Inventories of distillate fuel, a category that includes heating oil and diesel, decreased 6.02 million barrels to 135.9 million last week, the biggest drop since 2004. Gasoline inventories declined 2.11 million barrels to 204.2 million, the lowest level since June 2009, the report showed.

Refineries operated at 82.6 per cent of capacity last week, down 2.7 per centage points from the prior week and the lowest level since May, the report showed. Analysts projected a 0.4 per cent increase.

"The upside should be limited because of the problems in Europe and sluggish growth here," said Chip Hodge, who oversees a $US9 billion natural-resource bond portfolio as senior managing director at Manulife Asset Management in Boston. "When looking at the inventory numbers, it's important to remember that one week does not a trend make."

Futures fell earlier as the cost of insuring against Italian default rose to a record. Italian bond yields topped the 7 per cent level that drove Greece, Ireland and Portugal to seek bailouts. Prime Minister Silvio Berlusconi's offer to resign left his government struggling to implement austerity measures.

'Lack of Confidence'

"There's a lack of confidence in the Italian economy and political leadership," said Phil Flynn, vice president of research at PFGBest in Chicago. "Yields on Italian bonds are exploding and the dollar is rising on concerns about how the situation there will be resolved. The last thing Europe needs is for Italy to sink into recession."

The Standard & Poor's 500 Index dropped 2.7 per cent to 1,241.57, and the Dow Jones Industrial Average fell 2.4 per cent to 11,873.58. The euro tumbled 1.9 per cent to $US1.3574. A weaker common currency and a stronger dollar usually reduces the appeal of raw materials as an alternative investment.

The coming winter will probably be colder than average in the eastern U.S., creating a greater demand for heating fuels, according to forecasts that disagree over how bitter the weather will get.

The heating season will get an early start, with November expected to be colder than normal for the East Coast, according to seasonal outlooks released today by Commodity Weather Group LLC and Weather Services International. CWG predicts the coldest winter in a decade while WSI forecasts milder weather.
“With above-normal heating demand expected, withdrawal rates from natural gas storage are likely to run above normal in the consuming East,” said Chris Kostas, senior power and gas analyst at Energy Security Analysis Inc., which works with Andover, Massachusetts-based WSI.

The outlook by the two commercial forecasters comes less than a week after the U.S. Climate Prediction Center said the northern U.S. will probably have a colder and wetter winter because of a strengthening La Nina in the Pacific Ocean.

La Nina, a cooling of the water in the central Pacific, tends to mean colder-than-normal winter temperatures in the North and milder and drier weather in the South. It also moves the storm track across the U.S. farther to the north, which can mean more snow.

Price Impact

The colder weather may mean natural gas prices will rise as more energy is needed for heating starting next month, Kostas said in a statement from his Wakefield, Massachusetts, office. About 51 percent of U.S. households use natural gas for heating and power plants use about 30 percent of the nation’s gas supplies, according to Energy Department data.

November is expected to be 9.3 percent colder than last year, with December forecast to be 0.6 percent cooler, CWG President Matt Rogers said in his seasonal outlook.

The commercial forecasters diverge as to the severity and longevity of winter’s bite.

CWG, based in Bethesda, Maryland, predicts the coming winter will be the coldest since 2000-2001.
“That was a powerhouse winter,” Rogers said in an e- mailed response to questions.

He said the gas-weighted heating degree days value for the U.S. will reach 4,024 this year, compared with 3,928.2 last year and the 10-year average of 3724.4. The winter of 2000-2001 had a value of 4,167.7, according to CWG.

Degree Days

Heating degree days, calculated by subtracting the daily average temperature from a base of 65 degrees, are designed to show energy demand. Higher values mean cooler weather and more energy being used to heat homes and business.

Gas-weighted degree days give more value to areas where there are higher populations using natural gas to stay warm.

CWG also predicts much of Europe will be colder than normal, with the lowest temperatures most likely in France, Germany, Norway, Sweden and central Russia. Most of China will have lower-than-normal temperatures, the forecaster said.

WSI forecasts that the northern and eastern U.S. will have lower-than-normal temperatures in December and January, with milder weather in February and March.

“There are numerous indications that the cold will not be as extreme as it was during the last two winters,” WSI’s chief meteorologist, Todd Crawford, said in a statement. “The current state of the oceans is almost identical to that observed in October 2008, which was only a moderately cold winter.”

Heating Demand

By the end of the season, in March, WSI anticipates there will have been 6 percent less heating demand than last year. Demand will be 5 percent greater than the 1981-2010 average, according to a company statement.
The forecasts may be wrong, said Michael Schlacter, chief meteorologist at Weather 2000 in New York.
“We have to wait until winter before we can talk about winter, October is October,” Schlacter said in a telephone interview.

La Nina is an important element of this year’s forecasts and the phenomenon doesn’t always act as expected, Schlacter said. While the southern U.S. usually has milder temperatures in a La Nina, during last year’s episode there was a threat of snow at the Super Bowl in Dallas, he said.

The death of Libyan dictator Muammar Qadhafi marks the end of an era, both for the nation and its once-booming oil industry, choked off by the turmoil of the revolution. And as with prospects for the liberated Libyans to form a united, democratic government, the post-Qadhafi era begins with a sense of cautious optimism in the petroleum fields so essential to the nation's recovery.

Oil exports accounted for more than 95 percent of Libya's export earnings in 2010, according to the U.S. Energy Information Administration (EIA). Since the fall of Tripoli in August, Libya's national oil company has moved quickly to restore output, according to the International Energy Agency (IEA), but thus far most production—down to around 300,000 to 400,000 barrels per day from a peak of about 1.6 million barrels daily—has been diverted to satisfy domestic demand.

Projections for the country's oil output have been revised slightly upwards, but questions remain about the extent of infrastructure damage caused by fighting, and power struggles within the nascent National Transitional Council could undermine efforts to get Libya's oil industry back online.

"If this leads to greater political clarity within Libya, and to a more stable operating and investment environment, then it may result in a more rapid restoration of the Libyan oil sector," David Fyfe, head of the IEA's oil industry and markets division, said in a statement. "However, many logistical, operational, and security-related challenges remain in that country, so we are not changing our underlying assumptions on Libyan production recovery for now. We still believe it could take many months for production to regain pre-crisis levels."

Most of the current oil production is derived from fields in the western and southern parts of the country, largely unaffected by fighting. While restoring production to pre-war levels may prove more difficult as the dust settles and damage is assessed, Libya has many advantages in its efforts to revitalize its oil industry.

For one, damage to the oilfields as a result of clashes between pro-Qadhafi forces and rebels appear to be relatively localized with the most damage affecting terminals and pipelines in the eastern side of the country. Production facilities in the western and southern regions have already started ramping up, according to Sarah Emerson, president of Energy Security Analysis Inc., who expects output to exceed 450,000 barrels by December.

"Now the question is as [production] continues to ramp up in excess of the refining requirements, then [Libya] can begin to export and that's where the money comes in," Emerson says. "[Qadhafi's death] is really incidental to the process. It starts a clock ticking, which says, 'Can you get the political stability together?'"

Emerson predicts conservatively that the country could see production of 800,000 to 1 million barrels by the end of next year, but full capacity very likely won't return until the end of 2013, she says.

The gradual re-entry of Libya—which holds Africa's largest proven oil reserves, according to the EIA—into global oil markets will likely ease pressure on supply and lower prices for refiners around the world.
"It's good news for the Europeans.  It's good news for the East Coast United States," Emerson says.

Crude oil rose to the highest level in more than one month as U.S. stocks rallied after Bank of America Corp. reported better-than-estimated results, raising hopes that economic growth will stabilize.

Oil climbed 2.3 percent as the Standard & Poor’s 500 Index rose after Bank of America, this year’s worst performer in the Dow Jones Industrial Average, reported a third-quarter profit versus a loss a year earlier. Crude fell as much as 1 percent earlier as data showed China’s economy grew at the slowest pace in two years.

“The correlation between oil and equities has risen considerably since the first half of the year,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “You’re seeing traders conduct a risk-on, risk-off strategy. When there is good news, there’s an appetite for risk and you see oil and stocks gain.”

Crude for November delivery rose $1.96 to $88.34 a barrel on the New York Mercantile Exchange, the highest settlement price since Sept. 15.

Brent oil for December settlement rose 99 cents, or 0.9 percent, to $111.15 a barrel on the London-based ICE Futures Europe exchange. The spread between the December Brent and Nymex crude contracts narrowed to $22.62 from a record high of $27.88 on Oct. 14.

Prices were little changed from the settlement as the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles fell 3.13 million barrels to 337.3 million. December oil was up $1.86, or 2.2 percent, to $88.24 a barrel in electronic trading at 4:33 p.m.

Libya Output

Nymex oil and Brent “are coming closer as Libya comes back online,” said Richard Ilczyszyn, a Chicago-based senior market strategist at MF Global. Libya’s largest oil refinery at Ras Lanuf will be ready to start operations next month, Libyan Emirates Refining Co. said yesterday.

The plant, which can process 220,000 barrels a day of crude, was shut in March because of fighting between forces loyal to Muammar Qaddafi and rebels seeking the former leader’s ouster.

The country’s output fell to 45,000 barrels a day in August, according to Bloomberg estimates. The North African nation pumped 100,000 barrels a day last month.

The Standard & Poor’s 500 index gained 2 percent to 1,225.38 after dropping as much as 0.8 percent. The Dow Jones Industrial Average rose 1.6 percent to 11,577.05. The Standard & Poor’s GSCI Index of 24 raw materials increased 0.7 percent to 637.22.

Bank of America

Bank of America swung to a third-quarter profit on higher revenue, better credit quality and one-time gains. Shares jumped as much as 7.6 percent in New York trading.

“We continue to track the equity market,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. “The question is how the U.S. economy is going to play out in the next few months.”
Homebuilders in the U.S. were less pessimistic than forecast in October as near record-low borrowing costs and price decreases raised hopes the market will improve.

The National Association of Home Builders/Wells Fargo sentiment index climbed to 18, the highest level since May 2010, from 14 in the prior month, data from the Washington-based group showed today.

Economists surveyed by Bloomberg News projected the measure would rise to 15, according to the median forecast. Readings below 50 mean more respondents said conditions were poor.

Chinese Growth

China’s gross domestic product grew 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009, the country’s statistics bureau said today.

The growth rate was less than the median estimate of 9.3 percent in a Bloomberg News survey of 22 economists and followed a 9.5 percent increase in the previous three months. The country is the biggest oil consumer after the U.S.

Apparent oil demand in China, or the amount of processing volume plus net imports, increased 2.8 percent to 8.949 million barrels a day in September compared with a year earlier. That’s down from 7.97 percent year-on-year growth in August, based on Bloomberg data.

“All oil traders have their eyes glued to China but we are also earnings-focused,” said Ilczyszyn.
An Energy Department report tomorrow may show U.S. crude inventories climbed for a second week, according to a Bloomberg News survey.

Stockpiles of crude oil increased by 2 million barrels, or 0.6 percent, to 339.6 million in the seven days ended Oct. 14, according to the median of 13 analyst estimates in the Bloomberg survey before a weekly Energy Department report tomorrow.

Gasoline supplies dropped 1.5 million barrels to 208.1 million last week, the survey showed.
Oil volume in electronic trading on the Nymex was 614,320 contracts as of 4:33 p.m. in New York. Volume totaled 535,799 contracts yesterday, 20 percent below the three-month average. Open interest was 1.43 million contracts.

Natural-gas futures defied expectations and settled higher Thursday, despite a weekly U.S. government report that showed inventories growing much more than expected.

Analysts had been expecting a steep selloff and high market volatility if the inventory data proved bearish, as it did. Instead, they said the market move appeared to amount to "sell on the rumor, buy on the news"--a twist on an age-old expression. They said traders who believed the report would be bearish had taken short positions, or bets that natural-gas positions would fall. When prices did fall after the report, those traders bought at lower prices to cover their short positions and take profits. Gas futures dropped 3.5% Wednesday ahead of the report's release.

"I wouldn't say it's any spectacular bullish move here, it's just short-covering after the number came out," said Tom Saal, a senior vice president of energy trading at INTL Hencorp Futures in Miami. "I think we saw high-frequency traders coming in and trading against the EIA number, and selling down pretty hard and buying back their position."

Market analysts expected an inventory build, or "injection," of 103 billion cubic feet in the nation's natural-gas storage inventory. But the Energy Information Administration's weekly natural-gas storage report showed a build of 112 billion cubic feet. "This by far was the highest injection we ever saw in October," RBC Capital Markets said in note.

Natural-gas futures for November delivery finished the day up 4.2 cents, or 1.2%, at $3.531 a million British thermal units on the New York Mercantile Exchange.

Prices have been on a downward trend since June and are now trading at their lowest levels in nearly a year what is known as the shoulder season, as seasonal weather changes reduce demand for air conditioning but haven't yet increased demand for heating. Natural gas is a main source of energy for electricity plants.
With demand growing in the coming winter months as people turn on their heaters, prices may not have much further room to fall.

"What do we know about next month? It's going to be colder than this month," said Tim Evans, an analyst at Citi Futures Perspective. "You might not want to be short natural gas at $3.50."

Another explanation for the unusual price reaction was an arbitrage play between the current month contract and future months. Several analysts noted the large spread between prices for the current month and future months during winter, where prices are nearly 50 cents higher. They suggested some traders with access to free or cheap storage space may be buying now and locking in profits to sell when it gets colder.

"You can buy it today and sell in January and make 50 cents on a gross basis," said Chris Kostas, a senior analyst with Energy Security Analysis Inc. "Even if you're paying 20 cents a month on storage, you're still making money on that particular purchase."

Reports of cooler weather in the coming weeks and months around the U.S. also appeared to support the market. Weather analysts expect a cooling trend through most of the eastern half of the U.S., except for the northeast, and above-normal temperatures in the southwest.

Gasoline is tumbling to an eight- month low as reduced U.S. growth causes pump prices to follow crude oil's decline after lagging behind since April.

Prices may drop 20 cents to $3.19 a gallon by early November, according to the median estimate of eight analysts in a survey by Bloomberg News. Gasoline has fallen 15 percent from this year's high of $3.985 on May 4, according to Heathrow, Florida-based AAA, the largest U.S. motoring organization. West Texas Intermediate oil, the most-traded U.S. crude grade, retreated about 30 percent over the same period.

"The worry that the economy could slip back into a recession is putting pressure on oil prices, and prices at the pump are coming off," Andy Lipow, president of Lipow Oil Associates LLC in Houston, an oil-industry researcher and former trader for Vitol Group, the world's biggest independent oil trader, said in a telephone interview on Oct. 4.

Oil Prices Crude oil for November delivery traded today as low as $81.79 on the New York Mercantile Exchange, down from its 2011 peak of $113.93 reached on April 29. Pump prices have dropped to $3.39 a gallon from the high in May, according to AAA data.

"Gasoline prices are going to bottom out pretty soon and it will be supply-driven," Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts, a global energy-forecasting and consulting firm, said by phone on Oct. 5.

"Everybody knows demand is pretty awful and there's shutdowns for economic reasons like Trainer and I think you will see a lot of quiet shutdowns where maintenance is dragged on for months."

Anyone hoping that recent falls in commodity prices would provide a boost to powerhouse Asian economies and help lift the developed world out of recessionary danger will be disappointed. The region's focus remains firmly on inflation.

Commodities from crude to corn have slid in the last quarter, with many showing the most dramatic losses since 2008, when Lehman Brothers collapsed. The turnaround follows sharp gains earlier in 2011 when investors flocked to commodities on signs of strengthening economies.

Asian countries such as India and China saw demand suffer little from the higher prices of the first half, and worry now that softer prices will only whet the appetites of swelling populations, growing better off after years of dramatic economic growth.

Fuel and food costs drive inflation for many countries in the region and Brent oil prices are still up nearly 7 percent this year while corn is averaging $6.47 a bushel this year, up from $5 in 2010.

Both India and China are showing enviable rates of growth at least six times that of the United States, even if expansion has slowed. Domestic demand is driving much of the growth, rather than exports to the developed world.

Both countries have populations already in excess of one billion and in India's case, it is adding nearly an Australia of people every year, with a growing middle class that wants more and has more to spend.

"Rising incomes and populations in developing Asia will continue to drive demand for agricultural commodities and changing dietary habits will further increase these pressures," said Rajiv Biswas, Asia-Pacific chief economist at IHS Global Insight.

Exports from China, dubbed the world's factory, are still important to maintain its growth of close to 10 percent but the economy is now mainly driven by domestic investment and consumption.

BLESSING IN DISGUISE?
Domestic concerns have just prompted Indonesia, southeast Asia's largest economy and the world's top producer of palm oil, to hike taxes on crude palm oil exports in order to favor its own refining industry.
It is also expecting its domestic market for biofuels to help it weather any fall in exports of the product because of the global slowdown.

The resulting boost to domestic agricultural industries would be a "blessing in disguise," Agriculture Minister Suswono says.

Asian countries are also increasing trade with each other, moving further away from the United States and Europe, just as those economies look to them to power recovery.

"Development of trade relations mean (Asian) countries rely less on the U.S. and Europe than three years ago. China is the fastest growing trading partner for India," said Ulrich Bartsch, senior economist at the World Bank. "Asia is increasingly becoming its own growth pole."

INFLATION, PERCEPTION

The difference in the impact of the fall in oil prices on both growth and inflation perceptions is a stark reminder of the discrepancy between Asia and the Western economies.

For many Asian energy consumers, the impact of this quarter's 8.6 percent fall in Brent crude is minimal because energy prices are subsidized or set by the government.

So lower prices curb budget deficits or boost surpluses but do little to put ready cash back in the hands of drivers.

In China, the world's second-largest oil importer, the drop has not brought any relief at the pump, where retail gasoline prices are still at record highs.

And with winter just around the corner, the government is likely to keep retail prices high to protect its state refiners to ensure they produce enough to feed energy-guzzling heaters and coal trucks.
On the other side of the globe, cheaper gasoline is "like a tax cut" to U.S. consumers, says Sarah Emerson, director of Energy Security Analysis Inc.

"Maybe they'll buy another pair of shoes or splurge on steak instead of chicken for dinner. This is the direct stimulus they're getting from lower prices for gasoline and auto-diesel," she added.

MEAT HEADACHES
China is grappling with record pork prices which the International Monetary Fund (IMF) has said will delay its escape from high inflation -- running well above target and near three-year highs of 6.5 percent.
Pork and poultry prices in China are likely to be fueled further by stubbornly high soybean and corn prices. So the world's second-largest corn consumer is focusing on raising domestic production and taming booming demand, but is still facing the need for rising imports.

"I can't see China cranking growth. Inflation is still uncomfortably high," Credit Suisse's Deverell said.
Rice prices are on the rise due to domestic politics in top exporter Thailand. The Thai government plans to raise the price it pay farmers for their rice, which will keep more supplies at home and drive up the export price.
"Rice prices ... risk pushing up inflation not just in Thailand but across Southeast Asia," Neumann said.
Countries across the region, where rice is a staple for the poor, are scrambling to avoid a price surge.

Asian policy makers will be warily watching developments in the rice market, whose potential contribution to regional inflation threatens to outweigh any boon conferred by falling grain prices.

With currencies in the region also depreciating against the dollar, which is used to price many global commodities, what little relief there is from lower import costs is reduced.

And the developed world should count its blessings at the temporary relief in prices as it pins its hopes on Asia to pull it out of recession. In the end, Asia's precipitous growth is likely to drive those prices back up.
"The downturn in commodity prices ... is taking place against a megatrend of shifting economic power from West to East," said Biswas.

"The rise of China and India is driving a longer-term uptrend in commodity prices."

The Organization of Petroleum Exporting Countries’ oil output in September rose to the highest level since November 2008, as a Saudi cut was outpaced by Iraqi and Libyan gains, a Bloomberg News survey showed.

Production increased 75,000 barrels, or 0.3 percent, to average 30.055 million barrels a day, according to the survey of oil companies, producers and analysts. Daily output by the 11 members with quotas, all except Iraq, dropped 15,000 barrels to 27.285 million, 2.44 million barrels above their target.

Saudi Arabia, OPEC’s biggest producer, reduced output by 90,000 barrels, or 0.8 percent, to 9.76 million barrels a day. August output of 9.85 million barrels a day was at the highest level since at least January 1989 when Bloomberg monthly data begins. The kingdom exceeded its quota by 1.709 million barrels.

“The Saudis don’t want to see a significant price collapse,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. “I don’t see them making any big cuts for a while because prices are still high enough.”

Saudi Warning

OPEC’s June 8 meeting in Vienna broke up without an accord, the first time in at least 20 years that members couldn’t agree on quotas. Saudi Arabia and other Persian Gulf states wanted OPEC to raise output by 1.5 million barrels a day. Ali al-Naimi, the Saudi oil minister, said his nation was “committed to supplying the needs of the market regardless of the disagreement.”

Crude oil for November delivery dropped 98 cents, or 1.2 percent, to $81.16 a barrel at 10:13 a.m. on the New York Mercantile Exchange. Futures have dropped 19 percent since the June meeting. Brent oil for November settlement fell 79 cents, or 0.8 percent, to $103.16 a barrel on the London-based ICE Futures Europe exchange.

“The Saudis want to put other members on notice and will refrain from making big cuts,” Emerson said. “They want Iran, Ecuador and other countries that walked out of the meeting in June to feel consequences.”
Iraqi production rose 90,000 barrels, or 3.4 percent, to 2.77 million a day this month, the highest amount since October 2001. Output had been depressed since the U.S.-led invasion of the country in March 2003. The Persian Gulf nation was the group’s third-largest producer in September.

Libyan output rose 55,000 barrels to 100,000, the survey showed. Production in the North African nation has tumbled from 1.585 million barrels a day in January, the last month before an uprising against the government of Muammar Qaddafi.

The decline in gasoline prices since Labor Day accelerated in the past week, with regular falling almost 9 cents on Long Island from a week earlier, the AAA said. At least two experts, however, say prices might be nearing bottom now.

Regular averaged $3.829 a gallon on the Island Wednesday morning, the motorist group said, representing a 12-cent-a-gallon decline in the past 30 days.

Price declines had been forecast by experts, citing reduced demand with the end of the summer driving season, the gradual switch this month to less-expensive winter gasoline, and weak crude oil prices.
But the decline could be arrested as Conoco-Phillips and Sunoco plan to sell or shut down in coming months three Philadelphia-area refineries that account for about half of the East Coast's refining capacity -- about 700,000 barrels of oil a day, according to the U.S. Department of Energy.

Carl Larry, director of energy derivatives and research at Blue Ocean Brokerage Llc in Manhattan, said the loss of their capacity could help push prices upward at local pumps, by making the region more dependent upon expensive imports from Europe.

Larry said it's likely the refineries will slow their output in coming weeks. "It doesn't make a lot of sense to keep them running at these high levels," he said.

Even without that factor, Sander Cohan, a principal and gasoline analyst at Energy Security Analysis Inc. in Wakefield, Mass., says he thinks any further decreases in pump prices will be modest as refineries begin scheduling seasonal shutdowns for maintenance and as supply becomes better synchronized with seasonally falling demand.

The highest average price for a gallon of regular gasoline on Long Island so far this year was $4.284 on May 12 -- 6.2 cents shy of the record $4.346 set July 8, 2008. Longislandgasprices.com, which is based on motorist reports, yesterday posted prices for regular as low as $3.49 a gallon at two stations in Bay Shore and as high as $4.59 a gallon at a station in Smithtown.

Demand nationally last week was 2.7 percent lower than a year earlier, with 61.1 million barrels sold at U.S. gasoline stations, according to MasterCard Advisors.

Heating oil's price on Long Island also fell in the past week to an average of $3.927 at full-service dealers, according to the state Energy Research and Development Authority.

The Philadelphia refining industry is up for sale.

ConocoPhillips on Tuesday yielded to the tough economic climate for East Coast refining, saying it would sell its refinery in Trainer, Pa., and shut down the facility in six months if it doesn't find a buyer. That facility will compete for buyers with two nearby refineries owned by Sunoco Inc., which earlier this month said it would idle the plants by July if it hasn't sold them as it exits the refining business.

Together, the three refineries can process 700,000 barrels of crude oil per day, accounting for nearly half of the refining capacity on the East Coast and about 4% nationwide. The loss of that supply could push up gasoline prices and improve profit margins for some refiners, while also making the East Coast more dependent on gasoline imports.

"After exploring a wide range of alternatives for the refinery, the decision to sell is based on the level of investment required to remain competitive," Willie Chiang, a Conoco senior vice president, said in a statement. Conoco had previously said it intended to sell refineries as it seeks to reduce its exposure to the gritty, often low-margin business of turning crude into gasoline.

Conoco, which is spinning off its entire refining segment next year, is immediately idling operations at the Trainer refinery, located southwest of Philadelphia, and expects to report a $300 million impairment this quarter. Conoco employs 421 people at the refinery and related operations, and another 240 contractors. A spokesman said Conoco will find other jobs within the company for as many employees as possible if it closes the refinery.

"We challenge ConocoPhillips to aggressively seek a buyer for the Trainerfacility. The future of a lot of hardworking men and women, their families, and their community is at stake, as well as the future of many East Coast families who depend on home heating oil and other products from this refinery," United Steelworkers Union International Vice President Gary Beevers said in a stement after the company's announcement.

The U.S. refining industry has been pinched by global crude prices that have increased about 60% in the last two years before falling last week and by declining consumer demand for gasoline. These pressures have fueled a dog-eat-dog environment in which East Coast refiners are losing out to competitors, largely on the Gulf Coast, who can turn crude into gasoline and diesel at lower cost. East Coast refiners have also been unable to access a cheap supply of crude that is bottled up in Cushing, Okla., which has helped Midwest refiners.

Allen Good, a credit analyst at Morningstar, said there was a "very, very slim chance" that Conoco and Sunoco would find buyers for all three refineries. "We have to see some refining capacity culled from the U.S., and East Coast facilities are the top target at this point."

Refiners may be capable of producing more gasoline than consumers want, but some analysts say that subtracting 700,000 barrels a day would remove the cushion of excess capacity and push prices upwards.
"When you take almost a million barrels off the market, it will certainly have an effect on prices," said Sander Cohan, a principal at Energy Security Analysis Inc. "It makes the comfortable supply buffer we have less comfortable," he said, adding that prices would be most impacted on the East Coast but also nationally if Conoco and Sunoco shut down the refineries.

The loss of that capacity could help the margins of regional competitors like PBF Energy, a private-equity group that owns refineries in Paulsboro, N.J., and Delaware City, Del. It may also provide an opportunity for refiners in Europe and in the Gulf Coast to take advantage of higher retail prices in the East Coast and increase their gasoline shipments.

Greater reliance on the Gulf Coast for gasoline would also leave the East Coast more vulnerable to supply shortages from hurricanes, said Mark Sadeghian, a senior director for Fitch Ratings. Conoco said its East Coast refineries boosted production in 2005 to meet demand when hurricanes Katrina and Rita disrupted some Gulf refining.

The buyer's market doesn't bode well for Conoco and Sunoco to sell at a profit, analysts say.

"It's nice to sell when conditions are better," said Ed Osterwald, a managing director at Navigant. "That's not the case right now, and it may not happen for a long time."

Gasoline rose on speculation that the European Central Bank will boost efforts to contain the region’s debt crisis, bolstering economic growth and fuel demand.

Prices advanced as the ECB will likely debate next week restarting covered bond purchases and other measures, a euro- region central bank official said, as Greece teeters on the brink of default.

“There’s optimism that Europe is moving closer to some action to resolve the Greek debt crisis,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Gasoline for October delivery rose 1.47 cents, or 0.6 percent, to settle at $2.5694 a gallon on the New York Mercantile Exchange, the first increase in four days. Prices have fallen 15 percent in September and in the third quarter.

The reintroduction of 12-month loans to banks will also be discussed at the ECB’s Oct. 6 policy meeting, said the person, who spoke on condition of anonymity because the information is confidential.
Futures also gained as the Standard & Poor’s 500 stock index rose 1.6 percent at 3:17 p.m. in New York after an earlier loss of 0.5 percent.

“We’re just following equities,” said Fred Rigolini, vice president of Paramount Options Inc. in New York. “A second recession is on the back of everyone’s mind and you’re going to see a lot of this back-and-forth the next couple of days.”

Tighter Supplies

October gasoline’s premium to the November-delivery contract increased 1.07 cent to 4.1 cents a gallon on speculation that supplies will tighten after production dropped 3 percent in the week ended Sept. 16 to a 10-week low. Weaker margins on the Gulf Coast may push gasoline output even lower.

“There might be some anxiety over supply,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts.

Gulf Coast gasoline was at a $2.89 per barrel discount to Louisiana Light Sweet today, based on data compiled by Bloomberg as of 2:12 p.m. in New York, and has not traded at a premium since Sept. 13.
Heating oil fell as reports that U.S. economic activity slipped in August and new-home sales dropped to a six-month low raised concern that demand for diesel will slip.

New-Home Sales

Purchases of new houses declined 2.3 percent in August, figures from the Commerce Department showed today.

The Federal Reserve Bank of Chicago index, which draws on 85 economic indicators, was minus 0.43 in August versus 0.02 in July. A reading below zero indicates below-trend economic growth. The
“This is a market that is trading more on emotion than anything else,” said Phil Flynn, vice president of research at PFGBest in Chicago.

October-delivery heating oil declined 0.43 cent to settle at $2.7915 a gallon on the exchange. Heating oil has lost 9.3 percent in September and is down 4.8 percent this quarter.

Regular gasoline at the pump, averaged nationwide, declined 1.2 cents to $3.493 a gallon yesterday, according to AAA data. It was the 16th straight decline and the lowest price since March 4.

U.S. gasoline demand in August fell to a 10-year low for the month as consumers closed their wallets during the traditional summer driving season amid a lagging economy.

But industrial demand rose in the month, according to the latest fuel demand data from the American Petroleum Institute.

"U.S. consumer activity and industrial activity traced divergent paths," the API said in releasing the latest statistics.

Gasoline deliveries fell to 9.1 million barrels a day, down by 1.3 percent from a year ago, and the lowest August demand since 2001. Meanwhile, deliveries of industrial fuels such as diesel, jet fuel and other distillates reached 4.2 million barrels a day, or up 10.8 percent from August 2010, according to the API data. In all, U.S. fuel demand grew by 0.3 percent year over year.

With unemployment high and consumers still paying off the debt that accrued during the real estate bubble of the previous decade, discretionary consumer spending, including driving, will be low for at least the short-term future, said Sarah Emerson, principal at energy analysis firm ESAI Inc.

 Natural gas futures declined for a third day, reaching an 11-month low, on speculation that supplies of the fuel will be ample to meet winter heating needs.

Gas fell 0.7 percent as a shortfall to five-year average inventory levels narrowed to 1.1 percent in the week ended Sept. 16 from 1.6 percent the previous week, the Energy Department said today. Stockpiles rose 89 billion cubic feet to 3.201 trillion, above the five-year average gain of 72 billion.

“There’s no doubt that we’re going to have enough gas in storage to make it through the winter,” said PeterBeutel, the president of Cameron Hanover Inc. in New Canaan, Connecticut. “Gas traders haven’t been able to generate any sort of bull market that can keep itself going.”

Natural gas for October delivery fell 2.5 cents to settle at $3.705 per million British thermal units on the New York Mercantile Exchange. The futures are down 16 percent this year. The settlement price was the lowest since Oct. 27, 2010.

November $3.50 puts, bets that prices will fall, were the most active options in electronic trading. The puts rose 0.8 cent to 4.7 cents per million Btu on volume of 797 lots.

The price difference, or spread, between futures for delivery in October 2011 and January 2012 narrowed 4.4 cents to 47.8 cents. The contracts represent the difference in price between gas for delivery in the fall, when mild weather reduces fuel use, and the winter, when demand is highest.

Supply Report

The Energy Department data showed that a deficit to year- earlier supplies narrowed to 3.9 percent last week from 4.3 percent a week earlier. Analyst estimates compiled by Bloomberg showed an expected gain of 92 billion cubic feet. Stockpiles climbed 78 billion cubic feet a year earlier.

The inventory gain for last week was “modestly supportive, but it was still well above the five-year average rate and consistent with ongoing builds above the five-year average,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York, in a note to clients today. “It could have been worse, but it’s not a game-changer.”

The northern and eastern U.S. will probably be cooler than normal from October to December, increasing natural gas consumption for heating, according to a joint forecast by Weather Services International and Energy Security Analysis Inc. released Sept. 19.

A cooling trend in the Pacific known as La Nina may act with pressure differentials and atmospheric blocking in the Atlantic Ocean to lower temperatures along the U.S. East Coast, said Todd Crawford, WSI’s chief meteorologist.

Production Estimate

About 52 percent of U.S. households use natural gas for heating, according to the Energy Department.
Marketed gas production will average 65.79 billion cubic feet a day in 2011, up 6.4 percent from 61.83 billion last year, the Energy Department said in its monthly Short-Term Energy Outlook on Sept. 7.

U.S. gas drilling rigs increased 20 to 912 last week, the highest level since the week ended Jan. 28, according to Houston-based Baker Hughes Inc.

Temperatures in the eastern U.S. may be mostly normal from Sept. 27 through Oct. 6, according to Commodity Weather Group LLC in Bethesda, Maryland.

The high temperature in New York on Sept. 29 may be 72 degrees Fahrenheit (22 Celsius), 2 above normal, according to AccuWeather Inc. in State College, Pennsylvania. The high in Cleveland may also be 72, 3 above normal.

Power plants use about 30 percent of the nation’s gas supplies, according to the Energy Department.
Natural gas futures volume in electronic trading on the Nymex was 353,983 as of 2:44 p.m., compared with the three-month average of 286,000. Volume was 350,260 yesterday. Open interest was 946,723 contracts. The three-month average open interest is 979,000. The exchange has a one-business-day delay in reporting open interest and full volume data.

The northern and eastern U.S. will probably be cooler than normal from October to December, increasing natural gas consumption, according to a joint forecast by Weather Services International and Energy Security Analysis Inc.

A cooling in the Pacific known as La Nina may act with pressure differentials and atmospheric blocking in the Atlantic Ocean to lower temperatures along the U.S. East Coast, said Todd Crawford, WSI’s chief meteorologist.

“While October should be relatively mild across much of the U.S., below-normal temperatures will become more common in the eastern U.S. in November and across all of the northern U.S. by December,” Crawford said in a statement.

Natural gas traders use long-range temperature predictions to gauge energy use and market fluctuations. Hot or cold weather can increase demand for heating and cooling, and power plants use about 30 percent of the nation’s gas supplies, according to Energy Department data.

Maintenance of coal and nuclear-powered generating plants will put more demand on natural gas-fired electric plants in October, said Paul Flemming, director of power and gas services at Energy Security Analysis, a market research company based in Wakefield, Massachusetts.

Flemming said that because of increased gas demand in October, he doubts inventories will reach last year’s record of 3.84 trillion cubic feet. The inventory will probably be 3.65 trillion at the end of the current injection season, he said.

“In December, much-colder-than-normal temperatures across the northern tier of the U.S. will result in much higher heating demand for gas,” Flemming said in the statement. “Typically, early-season cold weather indicators are bullish for gas prices, as a long-term cold stretch starting in December could significantly reduce gas inventories.”

Andover, Massachusetts-based WSI also predicted colder- than-normal weather across the U.K. and Western Europe from October to December, which will increase energy demand there.

Sunoco Inc. said Tuesday it will exit the refining business, underscoring how tough it is for U.S. refiners to profit as they spend more to make gasoline while selling less of the fuel.

Sunoco's Philadelphia refinery will be sold or idled by July. Sunoco's refining segment has lost money eight out of the last 10 quarters.

U.S. refiners have been squeezed by the rising cost of crude oil, their primary raw ingredient. The global price of crude has increased by about 67% in the past two years, faster than gasoline prices. Refiners also face forecasts of declining consumer demand amid fears of a double-dip recession and the specter of tougher emissions standards. Those that are concentrated on the East Coast, like Sunoco, have felt the harshest effects as they compete with Gulf Coast refineries capable of processing less-expensive crude and European refineries that ship excess gasoline across the Atlantic.

Lynn L. Elsenhans, Sunoco's chief executive, said the company's refining business performance was "unacceptable" in a statement explaining the decision to sell its two remaining refineries and focus on shipping and marketing crude and gasoline through its network of pipelines and gas stations. Ms. Elsenhans said in a conference call Tuesday the company will review all aspects of its business and no options were off the table.

Sunoco's exit of the refining business after 117 years completes a gradual shift out of the sector, as it had reduced refining capacity 43% since 2009. Ms. Elsenhans last month said the company was bearish on refining as it posted a second-quarter net loss $125 million, its second consecutive quarterly loss. The company's refining segment has lost money eight out of the last 10 quarters.

"The movement out of the refining business is reflective of how difficult it is to be a refiner, trapped between declining consumer demand and rising crude prices," said Sander Cohan, a principal at Energy Security Analysis Inc.

Sunoco's departure comes as other energy companies have sought to shrink or shed their refining operations to focus on more profitable lines of business. So far this year, Marathon Oil Corp. has spun off its refining business, and ConocoPhillips announced plans to do the same by 2012. Murphy Oil Corp. last week sold its last U.S. refinery to Valero Energy Corp.

The refineries on the seller's block have created opportunities for companies that are bullish on expansion in the sector. Valero also bought a refinery in the U.K. from Chevron Corp. earlier this year, and private-equity group PBF Energy has acquired three refineries since April 2010.

Sunoco had it harder than most refiners, analysts say. Its refineries in Philadelphia and Marcus Hook, Pa., lacked the capacity to convert cheaper, dirtier crudes into gasoline and diesel, and its troubles were compounded by repeated incidents that caused it to temporarily suspend refining operations. The company's East Coast presence meant it was unable to take advantage of the one bright spot in the industry that somesome competitors in the middle of the country were benefiting from: a cheap supply of crude bottled up in Cushing, Okla., which has helped lift the sector to profitability and delivered record margins to refiners closest to the glut, such as HollyFrontier Corp.

Meantime, the average price of a gallon of regular gasoline was $3.66 Tuesday, up 36% from a year ago, according to the auto club AAA. And U.S. gasoline consumption by volume in June, the most recent month for which figures are available, decreased 2.8% from a year earlier, according to the federal Energy Information Administration.

With U.S. consumer demand for gasoline flat or declining, "someone's got to lose out," said Rob Smith, a senior analyst at PFC Energy, a consultancy.

Refineries that can't convert cheap crudes, like many on the East Coast, "are the ones that are kind of facing an uphill struggle for the foreseeable future," he said.

If Sunoco doesn't find a buyer for the Pennsylvania refineries, it will idle them by next July—a sign that it anticipates they will be tough to sell, analysts said.

A decision to close down the refineries would remove the capacity to convert as much as 513,000 barrels of crude a day, and the tighter supply could benefit other refiners.

Gasoline futures advanced after the Energy Department reported inventories of the motor fuel fell to the lowest level since May as drivers filled their tanks before Hurricane Irene.

Futures rose 1.2 percent as gasoline stockpiles fell 2.8 million barrels to 208.6 million last week. Imports to the U.S. East Coast declined 28 percent to 591,000 barrels a day during the week ended Aug. 26 as Hurricane Irene approached the region, department data showed.

“There must’ve been a rush to inventories in advance of the hurricane,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. “In the last couple weeks, I’ve seen refiners being careful not to flood the market. They were supplying just enough gasoline to meet demand.”

Gasoline for September delivery rose 3.62 cents to settle at $3.032 a gallon on the New York Mercantile Exchange. Futures fell 2.6 percent this month and are up 24 percent in 2011.

The more actively traded October futures gained 3.48 cents to $2.8763. September Nymex gasoline and heating oil futures expired at the end of floor trading today.

Analysts estimated the government report would show a decline of 1.1 million barrels, according to a Bloomberg survey. Demand jumped 2.4 percent from a week earlier to 9.23 million barrels a day before the storm.

API Report

Futures were up earlier after the American Petroleum Institute said yesterday that gasoline stocks fell 3.11 million barrels last week to 210.8 million. Stockpiles of heating oil and diesel increased 276,000 barrels to 153.1 million barrels, according to the API report.

Distillate supplies gained 363,000 barrels to 156.1 million barrels, according to the Energy Department.
Heating oil for September delivery rose 0.9 cent to $3.0782 a gallon. October delivery increased 0.73 cent to $3.0840. Prices have gained 21 percent this year and dropped 0.6 percent in August.

Regular gasoline at the pump, averaged nationwide, rose 0.5 cent to $3.617 a gallon yesterday, according to AAA data. It’s the ninth consecutive price increase for the fuel.

When the price of crude oil moves up or down, the amount charged to motorists for the gasoline refined from it typically heads in the same direction.

But as seen this summer, movements in the two products’ pricing don’t necessarily happen at the same pace.

In early May, U.S. crude oil reached the highest price it has seen so far in 2012, about $115 per barrel. In recent weeks, the price has hovered mostly in the $80-86 range — reflecting a drop of 25 percent or more from the springtime peak. One of the sharper drops has occurred in the past month or so, as government debts and other economic concerns have weighed on crude oil prices in commodities trading.

In Northern Michigan and elsewhere, the decline in gasoline prices has been more modest than for crude. Petoskey gas stations, for example, charged about $4.30 per gallon for regular unleaded around the time that crude oil prices reached their high for 2011. On Wednesday, the price for regular gasoline stood at about $3.76 at most local stations — a price about 13 percent lower than was seen locally in May.

Those who monitor and analyze fuel price trends note that when crude oil prices are on a downward trend, gasoline sellers ratchet down the price for the refined fuel more gradually — since there tends to be more opportunity to realize a profit during the downward part of the price cycle than on the way up.

“Generally, when (crude oil) prices go up, the pump prices go up quicker, but when crude oil prices go down, typically the price at the pump takes longer to go down,” said Nancy Cain, a spokeswoman for AAA Michigan. “One of the reasons is, the gas was purchased at the higher price, and so many of the stations want to sell it at a higher price compared to what they paid for it.”

AAA Michigan monitors gasoline prices statewide. As of Wednesday, the AAA survey showed an average price of $3.71 per gallon for regular unleaded, up from $3.66 the previous day. A month ago, the statewide average stood at about $3.74.

Sander Cohan, a principal with Massachusetts-based firm Energy Security Analysis Inc., notes that easing in crude oil prices takes some time to translate through the supply chain to gasoline retailers.

The jump in gasoline prices earlier this year has chipped away at consumer demand for the fuel, he noted, and refiners have produced gasoline at a relatively slow pace so they can minimize their exposure to the low demand.

“(The gasoline price is) slower to fall because we’re eating away at a backlog of gasoline produced earlier this year (under higher oil prices),” Cohan said.

This year’s situation is different than in 2005 or 2006, when abnormally high fuel demand kept refineries running near capacity, he added. When gas prices previously reached a peak above $4 in 2008, he said many motorists learned to cut unnecessary driving from their routines — and have been applying the lesson again this year.

“Gas prices will follow crude down,” he said. “There’s plenty of capacity to produce gasoline.”

Although gasoline sold in the Midwest typically is made from domestically produced oil, Cohan noted that international influences on the gasoline market have factored into the slow decline for prices here.

Oil from the Eastern Hemisphere, such as Brent crude, has had an unusual price premium over the U.S. product in recent months — reflecting political tensions and unrest in some oil-producing parts of the Middle East — and the situation on that side of the Atlantic has tended to keep gasoline imports from enhancing the U.S. supply.

“It’s not economical to bring any of the European gasoline to the United States,” Cohan said.
Travel outlook
AAA Michigan expects that nearly 1.2 million Michiganians will travel 50 miles or more from home during the Labor Day holiday weekend, about 1 percent fewer people than traveled during that period a year ago. Nationally, AAA expects 31.5 million Americans will travel during the holiday timeframe (Thursday, Sept. 1, through Monday, Sept. 5), a 2.4 percent decrease from 2010.

Large majorities of those traveling are expected to do so by car, and will find higher gasoline prices than in 2010. On Wednesday, AAA Michigan’s survey showed a statewide average price of $3.71 per gallon for regular unleaded fuel, $1.02 higher than a year ago.

Heating oil rose on speculation that Hurricane Irene may disrupt East Coast refinery operations and a gain in durable goods orders indicated more demand for diesel.

Futures gained as Irene, a Category 3 storm, churned through the Bahamas on a path forecast to take it toward North Carolina’s Outer Banks this weekend, the National Hurricane Center said. Bookings for goods meant to last at least three years rose 4 percent in July, the most in four months, according to a Commerce Department report.

“We will probably end up shutting down the six refineries in the New Jersey Philly area,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Heating oil for September delivery rose 1.82 cents or 0.6 percent, to settle at $2.9607 a gallon on the New York Mercantile Exchange. Futures have gained 3 percent in four straight days of increases.

The U.S. East Coast, or Padd 1 region, has 10 operating refineries with a capacity of 1.21 million barrels a day, according to Energy Department data. The area accounts for 7.1 percent of total U.S. operating capacity.
Irene’s top winds reached 120 miles (193 kilometers) per hour today as it churns 250 miles southeast of Nassau, Bahamas, according to a National Hurricane Center advisory at 2 p.m.

After Irene finishes with the Bahamas tomorrow, the storm, a Category 3 on the five-step Saffir-Simpson scale, is expected to arc north, passing near North Carolina’s Outer Banks and striking southern New England late Aug. 28 or early Aug. 29, according to the hurricane center track.

Distillate Demand

Demand for industrial, trucking and home-heating fuels rose 8.4 percent last week to 3.85 million barrels a day, the Energy Department reported today. On a four-week average, consumption was 8.3 percent higher than a year earlier.

“There’s a good demand number this week,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts.

Supplies of heating oil and diesel rose 1.73 million barrels to 155.7 million, the highest level since the week ended Feb. 25.

Gasoline for September delivery rose 0.18 cent to settle at $2.8784 a gallon on the exchange. The contract has lost 7.5 percent this month.

Prices were little changed as stockpiles of the motor fuel increased 1.36 million barrels in the week ended Aug. 19 to 211.4 million.

“This is the time of year you can almost bank on draws,” said David Pursell, a managing director at Tudor Pickering Holt & Co. LLC in Houston.

Gasoline Demand

Motorists in the U.S. typically use the most fuel between Memorial Day in late May and Labor Day, which falls on Sept. 5 this year.

Gasoline demand, measured by deliveries to wholesalers, fell 2 percent to 9.01 million barrels a day, the lowest level in four weeks. Measured on a four-week average, consumption was 2.4 percent below a year earlier.

Regular gasoline at the pump, averaged nationwide, rose 0.3 percent to $3.575 a gallon yesterday, according to AAA data.

U.S. benchmark oil prices have tumbled since early May, but drivers—and the economy—have yet to feel the full benefit.

While crude-oil futures on the New York Mercantile Exchange are down 38%, ending last week at $82.26 a barrel, the average price of gas at the pump is down just 9% in that time.

That suggests that some forecasts for an easing of pressure on the U.S. economy may be optimistic, for now. Economists estimate that a $10 drop in oil prices translates to an increase of a few tenths of a percent in gross-domestic product growth. But that is largely dependent on the decline in prices flowing through to consumers. With financial markets tumbling due to fears of a second recession in the U.S. and debt contagion in Europe, dropping fuel costs would be a welcome relief for household budgets and business balance sheets.

The disparity comes in part because of a quirk in the oil market—U.S. gasoline prices are affected far more by international crude prices, which haven't come down as much as U.S. crude prices. In fact, the gap between international prices and U.S. Nymex oil is at a record high. That all could change—even if temporarily—should the success of rebel forces in Libya fuel investors' hopes for the reopening of the oil fields in the nation.
Even then, gas prices are still lagging behind. Much of the fuel sold in the U.S., especially on the East Coast, follows the price of Brent crude, which is down 14% since the beginning of May. The Nymex price is primarily a benchmark for some oil in the middle of the U.S.

Brent is being held relatively high by strong demand from emerging markets such as China, and lingering worries about turmoil in the Middle East, which could curtail supplies. Refiners have been reluctant to ratchet down prices, hoping to capture as much profit as possible lest prices shoot higher again, said Sander Cohan, principal at energy consultancy ESAI Inc.

"Typically, the retailer will raise prices in front of rising crude and be more reluctant to lower prices" when it drops, he said.

Some consumers have noticed.

"I don't understand how the oil price can fluctuate so much, and yet the price of gas has just not changed," says Ritch Blasi, a 57-year-old telecom marketer from Middlesex, N.J. "If a barrel of crude drives the price, there's a lot of different things that happened between that crude and when it goes into my car. And something in there is messed up."

A lag may be expected, but this time around it is far more pronounced. In the second half of 2008, for example, when oil slumped 68%, gasoline prices fell 61%. Regular-grade retail gasoline was at $3.58 a gallon last week, according to the Energy Information Administration. Prices remain 33% higher than this time last year, while crude is just 11% higher.

Many suggest that crude prices may be unlikely to fall much further, removing hopes for further relief for the economy.

In a shift from recent years, when investment flows and prices of other assets were guiding oil-price projections, analysis of supply and demand is regaining its importance. The continued thirst for oil in China and other countries has become a crucial part of that.

Nymex prices have hewed close to $80 in recent trading. Tim Evans, an oil analyst with Citi Futures Perspective, said prices near current levels are reasonably balanced given the current outlook for oil supply and demand, a view shared by several market watchers.

J.P. Morgan Chase & Co. expects oil demand to grow by as much as 1.2 million barrels a day this year, despite worries that the U.S. is downshifting to another recession, with turmoil in the U.S. and Europe cutting just 250,000 barrels a day from its earlier forecast.

The International Energy Agency, an agency looking out for the interests of oil-consuming nations, expects a more conservative increase of 600,000 barrels a day, based on a forecast that the global economy will grow by 3% in 2011.

"Demand growth continues to be driven almost exclusively by emerging markets," wrote Lawrence Eagles, J.P. Morgan global head of oil research, in a report.

China's fuel consumption is expected to grow by 6.1% this year despite efforts by the government to slow growth, and will reach more than 10.1 million barrels a day in 2012, according to the IEA. Demand is expected to grow by 3.6% this year in India.

On the supply side, the civil war in Libya has meant exports from that country have essentially halted. Before the outbreak of fighting, it was producing 1.7 million barrels of oil a day.

Overall, though, the expected growth in global demand for oil has outweighed the decline in gasoline use seen in the U.S. The Department of Energy expects U.S. demand to fall to 10-year lows during what's usually the peak summer driving season.

U.S. gasoline prices are affected far more by international crude prices, which haven't come down as much as U.S. crude prices. In fact, the gap between international prices and U.S. Nymex oil is at a record high. Above, a gas station in Mill Valley, Calif., late last month.

Only a major cratering in the global economy is likely to bring either Brent or Nymex oil prices back down to the lows seen in 2008, says Adam Sieminski, chief energy economist at Deutsche Bank.

"Could you go to $40? Sure, but only if we're going to have the Great Depression all over again. Oil will be $30 and a cup of coffee will be 25 cents," Mr. Sieminski says.

HOUSTON -(Dow Jones)- A glut of oil in the heartland of the U.S. has launched four pipeline companies on a race to haul the crude toward the Gulf Coast, where the largest refining hub in the country lies. But not all are expected to reach the finish line, with the crowded field already putting one project in jeopardy.

Enbridge Energy Partners LP (EEP), Enterprise Products Partners LP (EPD) and TransCanada Corp. (TRP) are all in various steps of planning for new pipelines to bring south the oil from the storage hub of Cushing, Okla., where it is currently piling up thanks to advances in oil production technology that have caused a production boom in the U.S. interior and in Canada. In addition to the new pipeline proposals, Magellan Midstream Partners LP (MMP) said it is considering expanding its Longhorn pipeline and reversing its flow to bring up to 225,000 barrels a day of crude from revived oil fields in West Texas to Houston instead of shipping the oil to Oklahoma, as the company does now.

The Cushing glut has brought U.S. benchmark crude prices on Friday to a record discount of $26 per barrel to the price of European crude benchmark Brent. The pipeline companies, which charge tolls on every barrel of oil shipped along their lines, have a huge incentive to give Gulf Coast refiners direct access to all this bounty.
But the four proposals have a total capacity of 1.4 million barrels a day--about twice the amount that analysts have said is needed. "The issue here is not all these projects will go through," said Sander Cohan, an analyst with energy consultancy ESAI Inc. "First movers will have the advantage."

The crowded field has already bumped out one partnership. Enterprise said late Friday that Energy Transfer Partners LP (ETP), its partner in the proposed 450,000 barrel-a-day Double E line that would have brought Cushing oil to the Gulf by the end of 2012, dropped out of the partnership because there was insufficient commercial support for the line.

In the statement announcing the split, Enterprise said it "remains committed to developing a crude-oil pipeline from Cushing to the Gulf Coast." Representatives for Enterprise and Energy Transfer were not immediately available.

The break-up may give TransCanada an extra edge to be the first out of the gate. The Calgary company says it has already signed long-term contracts to start shipping crude along its 500,000 barrel-a-day Keystone expansion by the beginning of 2013 and is just waiting for government approval to build.

"This clearly demonstrates that we have the support of the shippers," TransCanada spokesman Terry Cunha said.

TransCanada also has the highest regulatory hurdle to clear, however. Its Keystone pipeline starts in Alberta and, therefore, requires a special cross-border permit from the U.S. State Department, the awarding of which has become a focus of debate among groups concerned about the line's environmental impact.
TransCanada has invested $1.7 billion in the overall Keystone expansion and would be the biggest loser if its plans were scuttled, said Morningstar analyst Avi Feinberg.

"If that project were to fall through, you'd see a big response to the stock price," Feinberg said.
Meanwhile, Magellan Chief Executive Michael Mears told investors during an Aug. 3 conference call that the company is in "the final steps" of contract negotiations to reverse and expand its Longhorn pipeline to bring oil from the Permian Basin in West Texas to refineries to the east by the second quarter of 2013. The project would cost $425 million.

The least-advanced proposal so far has been Enbridge's announcement that it would extend its Monarch pipeline to bring up to 350,000 barrels of oil a day from Cushing to the Gulf. An Enbridge executive said in July that the company had by then completed "preparatory engineering work," while company spokesman Larry Springer more recently said talks with shippers were still shaping how the pipeline might ultimately look.
"Shippers are going to tell us what they want, and then it would be what best meets their needs," Springer said.
The pipelines that do get built will help erode the WTI-Brent spread to $5 to $10 a barrel within the next 18 months as the Cushing glut dissipates, analysts have said.

But if all crude demand forecasts are correct, at least one project will be left to wither on the vine, said Harold York, analyst at Wood MacKenzie.

"The last guy to announce will have to decide whether to scale back the project or drop the whole thing," York said.

Although planes take off and land round-the-clock at this city's bustling airfield, Paul Jacobson isn't focused on flying, but rather on how much it costs to fly. As the senior vice president of finance for Delta Air Lines Inc., he must navigate volatile fuel costs, which he thinks that oil speculators are driving to punishing levels.

During peacetime Delta is the world's largest consumer of jet fuel, edging out the Department of Defense. So even a small move in oil prices has an impact on the bottom line of a company that flies at least 700 of its own large and regional airplanes and counts more than 1,400 aircraft under its companywide umbrella.

Delta and the Air Transport Association, the lobby for airlines, have been out in front among 98 companies and trade groups that banded together to create the Stop Oil Speculation Now coalition. It's pushing for curbs on financial players in the oil markets, which they believe are pushing fuel prices high to profit from trading rather than from any need to consume fuel.

For most of the last 30 years, end-users of oil — such as airlines, oil refiners and trucking companies — dominated the futures market. They traditionally composed 70 percent of the market.
Today, that ratio has been flipped on its head: Financial players with no intent of ever using a barrel of oil make up 70 percent to 80 percent of the market in any given week.

Airlines argue that huge investment inflows from pension fund investors and Wall Street firms into the oil markets are driving volatility in world oil prices and distorting the price of crude oil and jet fuel.

Critics contend that the huge inflow of investment money into oil amounts to a self-fulfilling prophecy, with investors betting that prices in the future will go higher, thus driving them up. Wall Street investment banks touted commodities over the last decade as a way to reduce risk and enhance earnings, since commodity prices often moved in the opposite direction of stock prices.

"Given how much trading there is today in commodities, it warrants as much attention and scrutiny as the stock market gets, and deserves some checks on the power of any individual player so as not to unduly influence" pricing in oil markets, said John Heimlich, the Air Transport Association's chief economist.

"We don't want to be in a scenario where we have to `right-size' the airline for fuel prices. We want stable fuel prices so we can go and run our business, grow and be a normal business," Jacobson said in an interview at Delta's global headquarters here, next to Hartsfield-Jackson international airport. "When we have to react with capacity reductions, all of this stuff is important."

Capacity reduction is a fancy way of saying that Delta and its competitors have to ground airplanes when oil prices get too high. Because of rising fuel prices, they must cram more passengers onto fewer flights in an attempt to control their costs.

Rising oil prices are out of sync with a weak U.S. economic recovery. Delta and its competitors, all job creators, struggle to remain profitable. The price of the jet fuel they need to fly Americans to and from destinations is as volatile as the prices motorists pay at the local gas pump.

"The way to think about that in our context is about $100 million to the bottom line; more profitability or less profitability, depending on which direction that shifts," said Jacobson, who's also Delta's treasurer.

The airline consumes about 95 million barrels of jet fuel, or 4 billion gallons, annually. That's enough to power a car that gets 25 mpg 100 billion miles — or more than 10 times the distance to the sun.
At any point in time, Delta is hedging about 50 percent of its fuel costs. It does so through purchasing contracts for future delivery of oil, called futures contracts. It also does so by entering into private bets with Wall Street banks and other players in the unregulated over-the-counter market, sometimes called the swaps or derivatives market.

That's why Delta and the Air Transport Association are aggressively pushing regulators to rein in financial speculation. They want limits imposed on financial players across several oil-trading platforms, not just in the futures market. And they want to return to a market in which some speculation is encouraged but not to the point that it crowds out users of oil.

Futures markets are designed to bring together buyers and sellers, and through a process called "price discovery" they reach rational, mutually acceptable prices for the underlying commodity, in this case crude oil.
Since 2000, and especially since 2007, big institutional investors such as pension funds and commodity-investment funds have flooded into the commodities markets, taking positions in everything from coffee to crude.

This has led some analysts to argue that these financial players distort the price discovery process in the futures market and raise the price of oil.

However, Sarah Emerson, a Boston-based analyst for Energy Security Analysis Inc., disagrees.
"I think it is price discovery, but in a new and different world than we had 10 or 15 years ago. And it's a world, unfortunately, that the airlines will have to cope with," she said. "They consume a commodity that a lot of people want. It's in every country, in every economy, and it's subject to production problems. ... I would argue that price discovery is better than it ever was."

Emerson thinks that oil was priced too low for too long, and that traditional oil traders looked past real risks to global supply disruptions.

"The world is not perceived as safe as it used to be. Markets are all about perceptions," she said.
However, she agrees with airlines that speculation has raised the price of crude oil and that there needs to be greater transparency about trades to level the playing field.

"There is a premium, and I think that it is huge. There is a gray area for sure that the financial community is in, but I don't think we can say the current pricing is `wrong.' It is what it is. It's a market where there is asymmetric information, and unfortunately Delta is on the wrong end of that," the veteran energy analyst said.
Delta starts with the assumption that it's always short of the fuel it needs, since it doesn't produce any itself.

"We're short 95 million barrels of jet fuel per year if we want to keep flying. That's a risky position to have, and if you think about it in a Wall Street context, there isn't a trader on Wall Street that would take that big a position ... because of the risk around that position, so we've got to find ways to mitigate that," Jacobson said.

The airline does so by trying to guess the direction of oil prices in the futures market, then making private bets, with supplier contracts and a host of other financial mechanisms designed to hedge against rising oil prices.
American Airlines also is concerned about the role of speculative money in oil markets and how that affects its bottom line. The airline used almost 2.5 billion gallons of jet fuel last year, and it tries to hedge anywhere from 35 percent to 50 percent of its fuel needs, going out as far as 24 months in an effort to smooth out the volatility in oil prices.

"We fully support the Air Transport Association's effort to curb oil speculation driven by those traders who have virtually no intention of ever using or refining the oil they trade," said Sean Collins, a company spokesman in Fort Worth, adding that hedging efforts have produced cost savings in eight of the last 10 years.

The rise of emerging economies such as China and Brazil, drivers of growing global demand for oil, has aided this sales pitch. There's no reliable global information about supply, production and consumption of oil. The opaqueness of data encourages speculation.

Speculation is primarily felt in the futures market. When the price of an oil futures contract is higher six months from now than it is for delivery next month, it's a typically short-lived phenomenon called contango. Today, airlines and other end-users lament what's now being called "perpetual contango." Futures prices continue to rise irrespective of weak demand for oil in the sluggish U.S. economy.

"The pension funds, the asset managers, the index investors are essentially saying, `I just need a piece of the pie. I don't care if the price goes up or the price goes down, because I am doing it as a return-enhancer/risk reducer to my other asset,' " Jacobson said.

These investors care little about supply and demand, said Heimlich of the Air Transport Association.
"I think today a lot of people are playing in the oil market who don't know much about the fundamentals of energy markets, and they may not care much," he said. "It may not be malicious, but they may not be fully informed."

To appreciate what volatile prices mean to airlines, consider that when oil prices tumbled over a period in May, after a price spike, Delta saw the value of its hedges drop by $140 million. That big number is peanuts compared with the $1.2 billion that the top hedge funds invested in oil lost over those same days.

"When you look at the dollars invested and the magnitude of how these markets can move as a result of these non-consuming players that are in it, we think it's obvious that it has a pretty measurable and sizable effect," Delta's Jacobson said.

Oil historian Daniel Yergin has coined the term "financialization" of oil prices. In recent months, as investors fretted over whether Greece would default on its bonds, the United States would raise its debt ceiling and China would lose control of inflation, they flocked to oil futures to diversify their investment base.

"It's almost like oil is now the holy grail financial-vehicle proxy for the future," Heimlich observed. "If you are bullish on oil, buy Exxon Mobil stock. ... You can hedge currencies, play the gold market. But oil has become the choice, the vehicle."

As a consequence, airlines and motorists alike suffer.

"When the price of Apple (stock) goes up, the price of Wal-Mart (stock) goes up, a few people get hurt, but a lot of people benefit. When the price of a physical, widely used commodity like energy or food goes up, a lot of people suffer, and economies suffer," Heimlich said. "I think what we have at stake is far beyond the airlines' interest."

Gasoline futures rose as the Energy Department reported that inventories fell to the lowest level in 12 weeks.
Gasoline stockpiles shrank 3.51 million barrels in the week ended Aug. 12 to 210.1 million. It was the largest drop since the week ended April 8. Until last week, gasoline inventories were higher than at the start of the summer driving season in late May.

“We haven’t really been drawing gasoline this summer, so this is good,” said David Pursell, a managing director at Tudor Pickering Holt & Co. LLC in Houston. “But it may be too little, too late. Summer is over.”
Gasoline for September delivery rose 1.65 cents, or 0.6 percent, to settle at $2.8703 a gallon on the New York Mercantile Exchange.

Futures rose as high as $2.9268 before paring gains as equities retreated. The Standard & Poor’s 500 index was little changed at 3:28 p.m., after gaining as much as 1.3 percent.

“You got weak equities later on in the afternoon,” said Fred Rigolini, vice president of Paramount Options Inc. “But the dollar is pretty weak.”

The dollar touched a three-week low versus a basket of currencies of U.S. trading partners, increasing the investment appeal of commodities. The Dollar Index fell 0.4 percent as of 2:52 p.m.

U.S. gasoline use typically peaks between the holidays of Memorial Day in late May and Labor Day, which this year falls on Sept. 5.

Refinery Outages

Last week’s supply decline came as refineries shut units for unplanned repairs and imports trailed year-earlier levels.

“We have had a number of refining problems, most notably Valero Memphis, and we’ve been seeing lower imports into the U.S.,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Valero Energy Corp. (VLO)’s Memphis refinery, struck by a fire Aug. 5, may be shut as long as two months, Tennessee Governor Bill Hasla said in a letter to the Environmental Protection Agency on Aug. 11. The plant can process 195,000 barrels of crude oil daily, according to data compiled by Bloomberg.

Refiners reduced rates 0.9 percentage point to 89.1 percent. The highest level of refinery usage this summer was in the week ended July 15 when refiners operated at 90.3 percent of capacity.

Imports Rise

U.S. imports of gasoline rose 7 percent to 677,000 barrels a day, 37 percent below a year earlier.
“The bullishness comes from the lower refinery rates and constraints in imports,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. “What’s neutral is that demand is not great and driving season is basically over.”

Futures have surged 7.6 percent since Aug. 9 when gasoline slid to a five-month low settlement after the Federal Reserve said it will maintain record-low interest rates at least through 2013, noting a weaker labor market.

Supplies of heating oil and diesel rose 2.45 million barrels to 154 million, the fifth increase in six weeks, leaving inventories at a five-month high. The survey projected a gain of 550,000 barrels.

Demand for industrial, trucking and home-heating fuels over the past four weeks fell 10 percent to 3.55 million barrels a day. On a four-week average, consumption was 5.8 percent higher than a year earlier.
Heating oil for September delivery rose 2.9 cents, or 1 percent, to settle at $2.9616 gallon on the exchange, the highest settlement since Aug. 3.

Regular gasoline at the pump, averaged nationwide, fell 0.3 cent to $3.584 a gallon yesterday, according to AAA data.

As a U.S. economic rebound stalls and threatens to spiral into recession, oil demand in the world's top consumer may be slipping into an irreversible decline.

Last year's fledgling recovery in U.S. oil usage -- when demand rose 400,000 barrels per day (bpd) -- made up for only a part of the 1 million bpd demand drop during a year of economic turmoil that began in August 2008.
Until recently, most analysts believed a healthier economy would push U.S. oil use higher this year and next, before tighter environmental regulations, increased use of biofuels, and tougher fuel-efficiency standards kick in later this decade to lower demand permanently.

Instead, a sour economy may turn last year's demand growth into a one-off. With U.S. manufacturing and service sectors slowing, a recent S&P downgrade on U.S. debt, and a series of stock market falls that have rattled consumer confidence, the odds are tilting toward short-term declines as well.

Last week, the U.S. Department of Energy lowered its forecast for U.S. oil demand from growth to decline in 2011. It also cut its forecasts for growth in global oil demand, as did the Organization of the Petroleum Exporting Countries and the International Energy Agency.

"We see U.S. oil demand falling this year and, later, settling into steady declines after 2015," said Rick Mueller of Boston-based consultant Energy Security Analysis Inc.

"It's all about the transportation sector, and the trends point to lower oil use."

U.S. mandates require 36 billion gallons of renewables like ethanol be blended into motor fuel by 2022, up from 14 billion gallons this year. The Obama administration has also boosted fuel economy standards for passenger vehicles to 54.5 miles per gallon by 2025, more than double current standards.

GLOBAL APPETITE FOR OIL

Limp demand in the United States and Western Europe won't fully offset growth in developing countries like China and India, whose appetite for crude nearly guarantees world demand will keep climbing.

Last year's U.S. growth accounted for less than one-fifth of the rise in global oil demand, which was up 2.3 million barrels per day. But with the U.S. still burning more than 19 million bpd -- twice that of No. 2 oil consumer China -- slower demand here could further hammer U.S. oil futures, which have already fallen by one-quarter since hitting $114 a barrel in April.

Until the recent slowdown, consensus forecasts saw U.S. oil demand up around 100,000 bpd this year as GDP grew about 2.5 percent, said Adam Sieminski of Deutsche Bank.

"If you take that GDP estimate to 1.5 percent instead, it could leave no growth in U.S. oil demand."
The latest government data shows U.S. oil demand, which looked buoyant earlier this year, slipped from year-ago levels in each of the last four months as pump prices climbed. Gasoline use in July was the lowest on record for the month, according to MasterCard data.

Less demand may wrongfoot oil market bulls like Goldman Sachs, which continues to call for oil prices to surpass 2011 highs next year, as demand expands faster than output.

"For a long time the premise has been that demand growth will outpace supply, but it might be the other way around," said Tim Evans of Citi Futures in New York.

LESS RADICAL THAN 2008

Barring an acute double-dip recession, few analysts expect U.S. demand to repeat the radical declines of 2008 or 2009. Last year, U.S. demand rose for only the first time since 2005 when it peaked at 20.8 million bpd, but had still fallen more than 8 percent since then.

"Demand is reaching a plateau, and is then likely to fall slowly," said Mueller.
Higher unemployment since 2007 has cut U.S. vehicle miles traveled by about 2 percent, said James Coan at Rice University's Baker Institute in Houston. Americans without jobs drive about 55 percent less, Coan said.
Sunoco Inc, the Northeast's top independent oil refiner, has been particularly blunt about the long-term outlook for its main business.

"We do not have a bullish outlook on refining," Chief Executive Lynn Elsenhans told investors on an early August conference call.

The silver lining for consumers is that retail U.S. gasoline prices are expected to fall further from levels above $4 a gallon earlier this summer. Wholesale gasoline futures have already dropped 19 percent since late April highs, and the reductions should trickle down to consumers soon.

According to Peter Beutel of energy consultancy Cameron Hanover in Connecticut, if recently lower wholesale prices hold, they could amount to savings of $115 billion over a year for drivers.

But recent history shows that even sharply falling pump prices can't resuscitate U.S. demand during a downturn. Between mid-2008 and mid-2009, oil use dropped by a million barrels a day, even as gasoline prices cooled by 30 percent.

The world economy may fall into another recession after the recent drop in the U.S. credit rating by Standard & Poor's Agency. Leading analysts of the British economic research and consulting company Capital Economics conclude that such developments are a worst-case scenario for the world economy.

"Of course, the lowered rating occurred at a time when financial markets and advanced economies have been very fragile. Excessive uncertainty can easily contribute to further declines in stock prices. In the worst-case scenario, this could be the impetus for the next financial crisis that will lead to another recession in the U.S. and Western countries", says the Capital Economics analysts’ report received via email by Trend.

Last week, the international rating agency Standard & Poor's downgraded the U.S. credit rating for the first time, dropping from the maximum rate of "AAA" to "AA+", with problems of hitting the government debt ceiling currently in the foreground.

The downgrade caused a series of reactions both in the stock and commodities markets. On the first day of trading, stock indexes fell in Asia and the Middle East, world market oil prices decreased significantly, while gold prices set a new historic record, exceeding $1,700 per ounce.

Nevertheless, according to Capital Economics analysts’ expectations, all negative reactions to the markets caused by the downgrade will be temporary.

According to the British analysts, the loss of the U.S. "AAA" rating is a clear sign that the world financial crisis will be felt for many years.

According to U.S. Energy Security Analysis, Inc. (ESAI) Head of the Oil Markets Department Rick Mueller, lowering the U.S. credit rating will have serious consequences for the world economy.

As Mueller told Trend, treasury bonds serve as the main financial instrument throughout the world, and so any doubts about their solvency would be very negative for economic growth, especially when the economy remains relatively fragile after the 2008-2009 recession.

Gasoline fell for the eighth time in nine days after Standard & Poor's downgrade of America's debt spurred concern that the economic recovery is faltering.

Futures lost as much as 3 percent after S&P lowered the U.S. long-term rating one level to AA+ on Aug. 5. The S&P's GSCI index of 24 raw materials, including oil and petroleum products, declined 2.4 percent at 1:39 p.m. in New York.

"The market anticipates slower economic growth, higher interest rates and slowing growth in demand," said Andy Lipow, president of Lipow Oil Associates LLC in Houston.
Gasoline for September delivery declined 5.05 cents, or 1.8 percent, to $2.7547 a gallon at 1:40 p.m. on the

New York Mercantile Exchange. Prices touched $2.7223. Today's loss for gasoline follows a 9.9 percent decline last week.

Prices are down 21 percent since settling at $3.4648 on April 29, the highest closing price this year.
"The downgrade seems to have triggered another avalanche of worry," said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut. "It just shows lots of things were predicted on the expectation that everything was going to get better."

September-delivery crude fell 3.4 percent to $83.52 a barrel and the Standard & Poor's 500 Index slid 3.8 percent.

Stronger Dollar

The dollar gained 0.6 percent against the euro, reducing the investment appeal of commodities, as the European sovereign debt crisis deepened. The European Central Bank is buying Italian and Spanish bonds to try and tame the region's credit emergency.

"Trading is all about the European sovereign debt crisis and the S&P downgrade even though the downgrade is hogwash because the U.S. has the ability to meet its obligations," said Dominick Chirichella, senior partner at the Energy Management Institute in New York.

Regular gasoline at the pump, averaged nationwide, fell 1 cent to $3.663 a gallon yesterday, according to AAA data. Prices have dropped every day but one since July 29.

Heating oil's premium to gasoline narrowed on speculation that a weakening economy will reduce demand for diesel used in manufacturing and transportation. Heating oil futures are traded as a substitute for diesel.
Total U.S. freight shipments fell 3.7 percent in July, the first decline in six months, according to Cass Information Systems.

Diesel Demand

"We've had demand weakness in rail and trucking transport indicators," said Andrew Reed, a diesel analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. "That reinforces the bearish view for diesel demand, which comes right back to the economy."

Supplies of distillate fuel, which includes heating oil and diesel, gained 7.2 percent in four straight weeks of increases culminating in the week ended July 29, according to Energy Department data. Inventories were the highest since the week ended April 1.

"If there's an economic slowdown, there will be less purchases of consumer goods and a drop in diesel demand," Lipow said.

Heating oil for September delivery fell 8.45 cents, or 2.9 percent, to $2.8572 a gallon.

Natural-gas futures settled at their lowest level since April on Wednesday as weak economic data led to negative sentiment among traders who now wait for Thursday's inventory data for more direction.

Natural gas for September delivery settled down 6.5 cents, or 1.6%, at $4.090 per million British thermal units on the New York Mercantile Exchange.

Futures first rose, but reversed course after 10:30 a.m. EDT following weak economic news and as crude oil and equities tumbled.

The benchmark contract ended the day below May 19's $4.094 settlement price to reach the lowest settlement since April 8, $4.041/MMBtu. Wednesday's intraday low was $4.066/MMBtu.

The Commerce Department said Wednesday that orders for manufactured goods fell in June by 0.8% from the previous month.

The Institute for Supply Management also said its non-manufacturing purchasing managers' index fell in July, two days after disclosing that its manufacturing PMI was down in July to 50.9, just above the level indicating that activity is expanding.

Pessimism in the market from the overall U.S. economic picture, paired with technical factors, led to the morning's sharp fall, said Jay Levine, president of Enerjay LLC.

"[The decline] is not surprising, considering the negative sentiment across the board," he said.
Any turnaround will be based on a change in trader sentiment first, he added.

The market may not have too much downside, said Chris Kostas, a senior analyst with Energy Security Analysis Inc.

"The $4.05 level has provided significant support going back over a year," Kostas said.

So far, other factors in the natural-gas market aren't offering support for prices. Hot weather continues in southern and central states, but temperatures are expected to moderate next week in the Midwest and East, Commodity Weather Group said. Sustained heat last month had driven up prices as more natural gas was in demand to generate electricity for cooling needs.

Tropical Storm Emily is expected to move over Haiti Wednesday night, the National Hurricane Center said. The storm isn't expected to move toward the Gulf of Mexico, however, where natural gas is produced.
For now, traders are focused on Thursday's storage report from the Energy Department.

In a Dow Jones Newswires survey, analysts and traders said they expect the Energy Information Administration Thursday to report that 36 billion cubic feet of gas was added to storage during the week ended July 29.

The market could test $4 if the storage number meets expectations, "but there's potentially a line of buyers both technical and fundamental to participate," said Pax Saunders, an analyst with Gelber & Associates, in a client note.

Last week, futures fell on the report of a larger-than-expected storage build. The EIA's natural-gas inventory report is scheduled to be released Thursday at 10:30 a.m. EDT.

NEW YORK - The Organisation of Petroleum Exporting Countries’ crude output rose in July to the highest level since December 2008, led by gains in Saudi Arabia and Angola, a Bloomberg News survey showed.

Production increased 245,000 barrels, or 0.8 percent, to average 29.565 million barrels a day, according to the survey of oil companies, producers and analysts. Daily output by the 11 members with quotas, all except Iraq, climbed 230,000 barrels to 26.845 million, two million barrels above their target.

OPEC cut its quotas by 4.2 million barrels to 24.845 million barrels a day beginning in January 2009 as demand fell during the last recession. The group’s June 8 meeting broke up without an accord, the first time in at least 20 years members couldn’t agree on quotas. Saudi Arabia and other Gulf states wanted OPEC to boost output by 1.5 million barrels a day. “The Saudis made no secret at the last meeting that they were unhappy and were going to pump more regardless of the lack of agreement,” said Rick Mueller, a principal with ESAI Energy, LLC in Wakefield, Massachusetts. “Kuwait and the UAE are boosting output, but the biggest increase is from the Saudis.”

Saudi Arabia increased output by 100,000 barrels, or 1.1 per cent, to 9.4 million barrels a day, the highest level since September 2008. Ali Al Naimi, the Saudi oil minister, said after the June 8 meeting that the kingdom is “committed to supplying the needs of the market regardless of the disagreement.”

The Saudi gain was the second biggest after Angola. June production was revised 90,000 barrels higher. The country exceeded its quota by 1.349 million barrels this month. “The Saudis are trying to keep prices under control and when these additional barrels show up, oil prices should drop,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts.

Massachusetts has long had some of the most expensive electricity prices in the country. The state’s steep electric bills chased many a manufacturer away and vexed plenty of high-tech firms that burn through power for their servers and cooling systems.

Those bills can be even more uncomfortable for consumers, who typically pay higher rates than large industrial users.

I wish I could say that problem’s going away. The truth is, we’ll always be a high-cost state – particularly when it comes to energy prices.

But there’s been a remarkable shift in the past two years in the electricity markets, one that is bringing some much-needed relief across the state.

Retail electricity prices have actually come down somewhat in the past year locally while they continued to rise, on average, nationwide. The federal Bureau of Labor Statistics reported on Monday that the average price for consumers in the Boston metro area fell 3 percent in June 2011 from June 2010. The national average, meanwhile, rose 1.5 percent.

In June 2010, the difference between the U.S. average and the Boston area’s average was 17.4 percent. By June of this year, it had fallen to 11.9 percent. This is a huge improvement from five years ago, when it was closer to 50 percent. To come up with the data, the BLS compares Boston’s residential electric bills with those in 86 other metro areas.

The difference isn’t quite as stark when you stack up the entire state against the nationwide average. But it’s still a big one.

U.S. Energy Information Administration records show the average price for all Massachusetts users – including industrial customers – was 41 percent above the national average in April. That may not seem like much to celebrate. But it’s a heck of a lot better than the 60-plus percent differences we saw in the springs of 2007, 2008 and 2009.

New England’s electricity grid is largely self-contained, with some power lines bringing in electricity from outside. Think of it as an island with a few strategically-placed bridges. So prices in the Boston area tend to move in tandem with prices across the six-state region.

To understand why New England’s power prices have dropped, you first need to understand why it’s so expensive here in the first place.

The answer to both questions boils down to one fuel source: natural gas.

More than 40 percent of the power plant capacity within New England is fueled by natural gas, or nearly twice the national average. Natural gas tends to be pricier than coal, a fuel more frequently used in other parts of the country. Also, New England is at a persistent disadvantage because we need to import most of our fuels from outside the region.

James Daly, the director of electric and gas energy supply at NStar, says natural gas plays an even bigger role in electricity prices in the region than what would be indicated by the number of natural gas-fired plants here. That’s because the organization that runs the power grid typically uses natural gas to set the clearing price for power in New England’s wholesale market. As a result, Daly says 70 to 80 percent of New England’s electricity can be directly tied to natural gas prices.

This reliance on natural gas has haunted New England’s electricity users for much of the past decade. But that same reliance began to work in our favor when gas prices plummeted about two years ago amid the discovery of new domestic resources.

Because NStar and other utilities buy most of their power with advance contracts – usually in six-month increments for residential power – Daly says it has taken some time for the plunge in natural gas prices to work its way through the system.

Daly doesn’t expect electricity to get much cheaper here in the near future. But Daly says the continued exploration of the Marcellus Shale, a vast resource of natural gas that stretches under much of Pennsylvania and western New York, should help keep prices relatively low in New England.

Mark Sylvia, the state’s Department of Energy Resources commissioner, says a few other factors could be at work as well. He says electricity demand in the state has fallen by about 5 percent in the past year, largely due to energy efficiency measures and cooler weather in the late spring and early summer.

Meanwhile, many other parts of the country that depend on coal have suffered from a rise in coal prices in the past year, according to Paul Flemming, director of power services at Energy Security Analysis Inc. in Wakefield. The recent discovery of shale gas resources has been a game changer for New England’s market, Flemming says. He’s aware that some have asserted a bubble could be forming in the natural gas market, one that could pop if that shale gas gets used up. But he says his firm expects abundant domestic natural gas supplies – and relatively stable prices – for at least the next two to five years.

All of this is of little relief for people like Bob Rio, a senior vice president at Associated Industries of Massachusetts. Rio says it’s possible the drop in natural gas prices gave the state’s large business users some breathing room. But Rio laments the fact that while the commodity costs of the fuel dropped significantly, the overall electric bills haven’t dropped much at all. That’s because they include the utilities’ delivery charges as well as a premium for renewable energy and efficiency measures.

Rio worries New England is getting too reliant on natural gas. This reliance is fine today, during the boom times of shale gas. But Rio wonders what would happen if, say, the Marcellus Shale doesn’t deliver on its promise. It’s important, he says, to take steps to protect the other remaining power plants in the region. With the pending demise of the Salem Harbor coal-and-oil plant and the possible closure of the Vermont Yankee nuclear reactor, New England could be poised to become even more dependent on natural gas a few years from now.

Rio makes some good points. After all, industry experts say electricity prices here will stay above the national average, well into the future.

But at least that gap has narrowed significantly. We live in a state where real estate is expensive, health care costs are skyrocketing and taxes seem to be lurking around every corner. In a place like Massachusetts, a victory like this – even if it’s a little one – counts for something.

Energy Security Analysis (ESAI) has announced its expectations that global oil demand will grow by an average of 1.5 million b/d compared to the first half of the year.

"There is no doubt that the demand for oil will be significantly higher in the second half than the first half of 2011. The cooling of the Arab spring and the recovery of Japan will guarantee that
outcome," the ESAI report reads.

The main engines for the demand growth will be countries of Asia and the Middle East.

The U.S. state Energy Information Administration (EIA) reported that global oil demand was 87.38 million barrels per day in the first half of 2011, which at 1.56 million barrels per day above the figure in the same period of 2010.

OPEC will easily meet at least half of the increase in demand in the second half. The other half will just as easily come from non-OPEC crude and nonconventional fuels, the report reads.

ESAI estimates that OPEC production in July will easily be as much as 1.0 million b/d higher than the March low point and production is rising, especially in Iraq and Saudi Arabia.

ESAI suggests that the world oil prices will fall on the weakening of the Libyan crisis.

"The Libya crisis continues, but is still likely to end within the next 6-12 months rather than result in a drawn out civil war. We expect that when the gasoline season is over, oil prices could fall significantly below current levels," the report reads.

Following the trading on Tuesday, July 26, the September futures price for WTI rose by $0.39 to $99.59 per barrel on the New York Mercantile Exchange. On the London Stock Exchange the September futures price for Brent rose by $0.34 to $118.28 per barrel.

Gasoline fell as stockpiles of the fuel increased, the dollar strengthened and equities slipped amid concern Congress won’t raise the U.S. debt ceiling ahead of next week’s deadline to avoid default.

Futures fell as the Standard & Poor’s 500 Index sank 1.8 percent as of 3:33 p.m. in New York and the dollar surged 1 percent versus the euro, reducing the investment appeal of commodities. The Energy Department said gasoline supplies rose more than expected. Prices advanced earlier on the chance a storm would threaten Gulf Coast refining.

“The hurricane threat was the only thing keeping gasoline afloat,” said Fred Rigolini, vice president of Paramount Options Inc. in New York. “But you’ve got equities down, the dollar stronger and the inventory report was pretty bearish overall.”

Gasoline for August delivery sank 1.13 cents, or 0.4 percent, to settle at $3.1423 a gallon on the New York Mercantile Exchange. The more actively traded September contract declined 1.54 cents, or 0.5 percent, to $3.0831. August Nymex gasoline and heating oil futures will expire at the close of floor trading July 29.
House Speaker John Boehner’s reworked deficit-cutting plan gained support today among his fellow Republicans, while Senate Majority Leader Harry Reid said his competing proposal to avert a potential U.S. default offer the only “true compromise.”

Less than a week from an Aug. 2 deadline to raise the nation’s $14.3 trillion debt limit, Congress’s budget scorekeeper said both measures fall short of their savings goals, prompting leaders to rework their proposals.

Supply Increase

Futures retreated from a 12-week high after the Energy Department said that supplies rose 1.02 million barrels to 213.5 million. A survey by Bloomberg News projected a build of 400,000 barrels. Refiners reduced rates 2 percentage points to 88.3 percent. Output of the motor fuel fell 0.6 percent.

Gasoline demand, measured by deliveries to wholesalers, fell 0.3 percent to 9 million barrels a day, the lowest level in 11 weeks, according to department data. On a four-week average, consumption was 3.3 percent below a year earlier.

“There’s a lot of bearish news in this report but much of it had already been absorbed by the market,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. “You have weak demand, an inventory build. But refiners are showing a bunch of restraint. They’re not gorging themselves on the spread.”

Storm Forecast

The National Hurricane Center forecast at 2 p.m. in Washington that an area of thunderstorms and heavy rain in the Caribbean between Cuba and Mexico’s Yucatan Peninsula has a “near 100 percent chance” of becoming a tropical depression or storm.

The U.S. Gulf Coast accounts for 42 percent of U.S. refining capacity, according to Energy Department data.
“It could certainly become a strong tropical storm, possibly a minimal hurricane,” said Tom Knight, vice president of trading and supply at Truman Arnold Cos. in Texarkana, Texas. “There’s cautious sentiment in the market because we haven’t had a legitimate threat to the Gulf Coast in three years.”

Regular gasoline at the pump, averaged nationwide, rose 0.5 cent to $3.698 a gallon yesterday, according to AAA data.

Heating oil for August delivery fell 3.08 cents, or 1 percent, to settle at $3.0826 a gallon on the exchange. The September contract declined 3.07 cents to $3.0944.

Distillate Supplies

Supplies of heating oil and diesel increased 3.39 million barrels to 151.8 million, the highest level since April 1. The survey projected a build of 1.63 million barrels.

Demand for the industrial, trucking and home-heating fuels climbed 1.7 percent to 3.46 million barrels a day. Measured on a four-week average, demand was 3.5 percent below a year earlier.

Heating oil was lower before the inventory report, falling after the Commerce Department said durable goods orders dropped 2.1 percent in June, indicating less demand for transportation fuel. Heating oil is traded as a substitute for diesel.

“A bad durable goods report would take the air out of diesel,” Cohan said.

Crude oil rose as U.S. housing starts surged and better-than-estimated earnings sent equities higher, bolstering optimism that the economy of the world’s biggest oil-consuming country will grow.

Oil climbed 1.6 percent after U.S. housing starts in June advanced more than forecast to the fastest pace in five months. Companies including International Business Machines Corp. (IBM) and Novartis AG beat profit forecasts. The rally accelerated after President Barack Obama endorsed a deficit-cutting proposal by a bipartisan group of senators known as the Gang of Six.

“Any sign of a recovery in the housing market is good for the economic outlook and the oil market,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “Developments in the equity market and dollar have been major drivers of oil recently. It’s being driven by macroeconomics.”

Crude for August delivery rose $1.57 to $97.50 a barrel on the New York Mercantile Exchange, the highest settlement since July 13. Futures have risen 27 percent in the past year.

Prices increased after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles dropped 5.18 million barrels to 354.2 million. August oil advanced $2.19, or 2.3 percent, to $98.12 a barrel in electronic trading at 4:32 p.m.

Brent oil for September settlement gained $1.01, or 0.9 percent, to end the session at $117.06 a barrel on the ICE Futures Europe exchange in London. Prices have risen 55 percent in the past year. Brent was $19.20 a barrel more expensive than September Nymex futures, versus $19.80 yesterday.

Equity Rally

Work began on 629,000 houses at an annual pace, up 14.6 percent from the prior month, figures from the Commerce Department showed. The level of starts exceeded the most optimistic forecast in a Bloomberg News survey of economists.

The Standard & Poor’s 500 Index rose 1.6 percent to settle at 1,326.73, and the Dow Jones Industrial Average increased 202.26 points, or 1.6 percent, to 12,387.42.

“IBM had great numbers, which is sending stocks higher,” said Kyle Cooper, director of research for IAF Advisors in Houston. “Oil is moving pretty much in lockstep with the stock market recently.”

Obama said the deficit-cutting proposal as “broadly consistent” with the approach being worked on by his administration. He called the revival of the proposal “good news” that may help move negotiations on the deficit and raising the federal debt ceiling.

Contagion Risk

The euro and oil also increased when European Central Bank council member Ewald Nowotny suggested that the bank may compromise and allow a temporary Greek default. European Union government chiefs plan to meet for the second time in a month on July 21, aiming to break a deadlock over a new Greek rescue that has spooked investors. Greek Finance Minister Evangelos Venizelos said an agreement is “attainable” at the summit.

Nowotny’s comments come as officials work to fix a sovereign debt crisis that’s spreading to Italy and Spain. The ECB has until now argued that any Greek default could spark a new financial crisis, derailing a German push to make investors help foot the bill for a second bailout of the country.

Greece’s sovereign-debt crisis risks infecting the rest of the euro region even if officials avert a default, threatening the global economic recovery, the International Monetary Fund said. German Chancellor Angela Merkel said today that the crisis can’t be resolved in “one spectacular step” at this week’s European leaders’ summit.

The euro increased 0.3 percent to $1.4148 in New York. A stronger common currency and weaker dollar boost the appeal of commodities as an alternative investment. The Standard & Poor’s GSCI Index of 24 raw materials rose 1 percent to 694.61. Eighteen of the commodities advanced.

U.S. Stockpiles

“Prices are rising amid hopes there will be some resolution to the European debt crisis,” said Matt Smith, a commodities analyst for Summit Energy Services Inc. in Louisville, Kentucky. “We had some good housing starts numbers and tomorrow we’re looking at inventories that will likely draw down for crude.”

An Energy Department report tomorrow may show U.S. crude supplies fell 2 million barrels, or 0.6 percent, to 353.5 million last week, according to the median of 15 analyst estimates in a Bloomberg News survey. It would be the seventh straight drop, the longest stretch of declines in two years.

IEA Decision

Futures have gained 2.2 percent in New York since June 22, the day before the International Energy Agency announced a release of strategic stockpiles. IEA member nations are likely to decide against offering more oil after last month’s release failed to curb prices and Middle East output rose, according to a Bloomberg News survey.

The IEA will say on or about July 23 whether members will continue emergency sales to make up for supply choked off by the Libyan conflict. The Paris-based agency is an energy policy adviser to 28 industrialized nations including the U.S., Japan and Germany.

Oil volume in electronic trading on the Nymex was 540,318 contracts as of 4:34 p.m. in New York. Volume totaled 544,671 contracts yesterday, 19 percent below the average of the past three months. Open interest was 1.51 million contracts.

Gasoline rose to its highest price since May after a government report showed U.S. inventories unexpectedly declined last week.

Futures gained 1.7 percent after Energy Department data showed total gasoline supplies fell 840,000 barrels in the week ended July 8 to 211.7 million barrels. Analysts estimated that stockpiles of the fuel increased 500,000 barrels, according to a Bloomberg News survey. Crude oil stockpiles shrank 3.12 million barrels.

“We got quite a shot in the arm with draw in crude and gasoline supplies,” said Jarmes Cordier, portfolio manager at OptionSellers.com in Tampa, Florida. “That was a surprise for the market.”

Gasoline for August delivery rose 5.34 cents to settle at $3.1516 a gallon on the New York Mercantile Exchange, the highest settlement since May 10.

Inventories of the fuel increased 0.8 percent on the East Coast and 0.7 percent in the Gulf Coast, with stocks in other U.S. regions decreasing, lead by a 2.9 percent drop on the West Coast.

Regular gasoline at the pump increased 0.9 cent to $3.645 a gallon yesterday, the eighth consecutive increase, according to AAA data. The price has gained 8.3 cents since July 4.

Distillate Supply

Distillate inventories increased more than analysts forecast, rising 2.97 million barrels last week to 145 million barrels, the government said. The survey called for an increase of 500,000 barrels.

“We should be seeing more stock builds like this at this type of year,” said Andrew Reed, a diesel analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. “The fact that we haven’t speaks to the strength of exports.”

Heating oil for August delivery gained 1.21 cents, or 0.4 percent, to $3.0997 a gallon on the exchange.

Demand for heating, trucking and industrial fuels sank 11 percent last week, the most since November, and on a four-week average was 5.2 percent below a year earlier, department data showed.

Distillate stocks rose on weakness in demand, which “appears in line with recent economic indicators showing a significant slowdown in U.S. economic activity” in the second quarter, Christophe Barret, a London-based oil analyst at Credit Agricole SA, said in a note to clients today.

Federal Reserve

Prices also rose as Federal Reserve Chairman Ben S. Bernanke told Congress the central bank is prepared to take additional action if the economy appears to be in danger of stalling.

“The idea that interest rates are probably going to be kept low” is giving strength to products, Cordier said. The message from the Bernanke testimony is that the Fed will come to the rescue, he said.

Bernanke’s comments are his first since a government report on July 8 showed the economy added 18,000 jobs in June, less than the most pessimistic forecast in a Bloomberg News survey of economists.

Oil consumption in North America will rise by 150,000 barrels a day and European use will decline, the Organization of Petroleum Exporting Countries said yesterday in its first forecast for next year.

“We expect that processing by refiners will increase as Midwest plants come back from unscheduled outages,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston. OPEC reducing the world growth forecast “might also be putting some pressure” on the fuel.

OPEC said oil demand will increase by 1.3 million barrels a day next year, compared with 1.4 million this year.
“An unsteady world economy is negatively affecting the oil market and imposing a high range of uncertainty for the short term,” OPEC’s Vienna-based secretariat said in its monthly report.

Crude-oil futures remained above $98 a barrel Thursday, losing some momentum following a report that U.S. inventories did not decline as much as expected.

Crude for August delivery rose $2, or 2.1%, to $98.65 a barrel on the New York Mercantile Exchange, after hitting an intraday high of $99.42 earlier.

Libyan rebels push on to Tripoli

Rebels of Libya's Western Mountain region seize a village from Gaddafi troops after a six-hour firefight, taking 11 prisoners.

Crude prices had received a boost earlier by two surprisingly strong reports on U.S. jobs that may signal stronger energy demand in the coming months.

Some of that momentum was lost, however, after the U.S. Energy Information Administration reported weekly inventory data.

U.S. crude-oil inventories declined by 900,000 barrels for the week ending July 1, according to the EIA. Analysts surveyed by Platts had estimated crude stockpiles to decline by 2.5 million barrels.

Rick Mueller, a principal at Energy Security Analysis in Wakefield, Mass., said demand on the West Coast cut into a strong boost in crude imports this week, as crude stocks in the eastern U.S. would have shown a surplus.

“Even though we’re in a peak demand period, we still only had a draw of about a million barrels overall,” Mueller said. “That would suggest the market is better supplied than expected.”

Total gasoline inventories declined by 600,000 barrels and distillate fuel inventories fell by 200,000 barrels for the period, according to the EIA.

Analysts had forecast gasoline inventories to increase by 500,000 barrels, and distillate inventories to rise by 1.1 million barrels.

Gasoline for August delivery rose about 10 cents, or 3.4%, to more than $3.10 a gallon on the Nymex.
The American Petroleum Institute late Wednesday said crude-oil stockpiles fell by 3.2 million barrels for the week ended July 1, and that gasoline inventories slid 1.9 million barrels and distillates dropped 1.6 million barrels. As a result, crude-oil futures received a boost in Asian and European trading.

Ahead of the U.S. stock open, Automatic Data Processing said private-sector employment rose 157,000 in June, well ahead of expectations for a 70,000 gain. Also, the Labor Department said initial jobless claims slipped in the latest week. The ADP report improved the outlook for Friday’s government report on U.S. jobs growth.

Natural gas drops on higher-than-expected inventory rise

The EIA also reported that natural-gas inventories rose 95 billion cubic feet for total storage of 2,575 billion cubic feet for the week ending July 1.

Analysts surveyed by Platts estimated a rise of 78 billion to 82 billion cubic feet.
Natural gas for August delivery, the most active contract, fell more than 6 cents, or 1.5%, to $4.15 per million British thermal unit on the Nymex. Before the report, natural gas had been trading around $4.23 per million Btu.

On the other hand, heating oil for August deliveryrose 11 cents, or 3.7%, to $3.07 a gallon on the Nymex.

As fuel prices have soared, plunged, and soared again in recent years, companies large and small have adjusted the way they operate to protect themselves from unpredictable swings in energy costs that can damage - or destroy - an unprepared business.

Some firms have adopted surcharges that rise and fall with the cost of fuel. Others are employing technological fixes. Still others have just stopped trying to predict where energy prices are headed.
For example, most heating oil dealers used to offer customers fixed-rate contracts for the winter season - signing them up in the summer and buying futures, which guarantee a delivery price at a later date, in commodity markets. At one time, they could be reasonably sure that heating oil prices would be lower in the summer and higher in the winter. Not anymore.

Many stopped offering fixed-price agreements after heating oil prices hit their all-time high in July 2008, then plunged the following winter. That left oil dealers to eat high- cost contracts to appease angry customers who had bought them out of fear prices would go still higher.

“I think that was the tipping point for the industry and maybe for consumers, too,’’ said dealer Ken Williams of Scott Williams Inc. in Quincy.

Scott Williams stopped buying futures and offering price-locking contracts several years ago. Instead, the company offers a price cap, for a fee, guaranteeing that clients won’t pay more than a predetermined amount. Scott Williams buys insurance to protect itself against losses should prices rise above that amount.

Fuel prices are probably no more volatile today than they have been over the past 40 years, analysts said. But the recent recession and the still-fragile economy have left US consumers and businesses hyperaware of the cost of crude oil, gasoline, and other petroleum products.

“A lot of these businesses have had near death experiences,’’ said Chris Lafakis, an economist with Moody’s Analytics in West Chester, Pa. “They clearly remember the stress and trauma that their businesses were put through during the recession and they’re trying to save costs where they can.’’

Certainly, it’s been a wild ride. Crude oil peaked above $145 a barrel in summer 2008, before diving below $40 five months later during the worst of the recession. Prices again surged above $100 a barrel earlier this year as political unrest swept across the the Middle East, but have since fallen.

On Friday, crude oil closed just below $95 a barrel in New York. The average price per gallon of regular, self-serve gasoline in Massachusetts is about $3.65, about $1 more than a year ago, according to AAA Southern New England.

These swings have led many companies to build mechanisms into their business models to help weather unpredictable changes in fuel prices. At the end of 2008, for example, the moving company Gentle Giant introduced a surcharge that adjusts monthly based on the retail cost of diesel. The surcharge is currently $32 per truck per day.

The surcharge is a more transparent way of covering fuel costs than, say, simply raising the company’s base rates - a move that might have made Gentle Giant’s prices seem uncompetitive, said Ronald Zahn, the chief financial officer. Customers still pay more, but at least they know the company isn’t padding profit margins.
“We try to get some of the increased cost back without looking like we’re trying to gouge people,’’ said Zahn.

Instead of surcharges or higher rates, several Central Massachusetts bed-and-breakfast owners formed a fuel-buying partnership to negotiate discounted pricing on heating oil. The consortium, formed during the recession when fuel prices were low, originally sought to cut costs to offset slow business. Now, the arrangement is easing the impact of higher prices.

Jean Day, owner of Winterwood at Petersham, said she saved $2,000 last year, helping to avoid room rate increases.

“You try to be as competitive and as generous to your customers as you can,’’ she said.
Low-cost carrier Southwest Airlines is still buying futures contracts to hedge against rising jet fuel prices, but also employs technology to cut costs. For example, all eligible Southwest planes have been outfitted with winglets, a curve at the wingtip that cuts drag and reduces fuel consumption.

Sander Cohan, a principal at the Wakefield market research firm Energy Security Analysis Inc., said such steps are examples of the extra attention companies now pay to energy.

“What happened to gasoline prices in 2008 still weighs heavily on business owners’ and consumers’ minds,’’ Cohan said. “Larger companies have [since] become more savvy about not necessarily fuel hedging, but fuel watching.’’

Car dealer Ernie Boch Jr., who sells several car brands through Boch Automotive in Norwood, said he has tracked gasoline prices more closely since 2008, when many drivers - hit by $4-a-gallon gas - began clamoring for high gas mileage vehicles. The movements in gas prices, Boch said, help him determine marketing strategy.

“It was almost a graph for the selling of hybrids and small cars,’’ Boch said. “Over the last couple of years I can tell when the hybrids are going to be super hot, and I can tell when the Corollas and the Civics are going to sell. It’s almost directly tied to gas prices.’’

Only a week ago, the Obama administration surprised the oil markets by announcing the release of oil from the Strategic Petroleum Reserve.

Initially, the price of oil fell by almost $4 a barrel. But since then, oil prices have rebounded back to their pre-announcement levels – about $95 a barrel.

What’s happened?

The oil markets, energy analysts say, are beginning to reflect some broader economic shifts taking place in the world economy – ranging from some indications of economic vitality in Japan to some predictions that the US economy will pick up in the second half of the year. In addition, the apparent resolution of the Greek debt crisis, even if only in a temporary measure, has ameliorated some concerns about another credit-led recession.

“Any event except a double-dip recession has a bullish cast to it,” says Sarah Emerson, president of Energy Security Analysis Inc. in Wakefield, Mass.

One clear indication of the strength of the oil market should come shortly when the Department of Energy announces which bids it will accept, at what price, for 30 million barrels of oil – the US share of the petroleum-reserve release. (The International Energy Agency is also releasing 30 million barrels.)

After hurricane Katrina disrupted oil in the Gulf of Mexico in 2005, Ms. Emerson recalls, President Bush released 30 million barrels of oil from the Strategic Petroleum Reserve. But the oil industry chose to bid on only 11 million barrels, indicating that demand wasn’t high.

“We may not need the oil now,” she says. “If the auction is underperforming, do they ask for more bids in July?”

On Wednesday, the Department of Energy released data that showed a decline in US inventories of crude oil and gasoline. “We had imports down a little; refinery runs were down a little bit,” says John Kilduff, founding partner of Again Capital, which trades commodities in New York. “It does not necessarily mean there was stronger demand for oil.”

While the price of oil has moved back up, the price of gasoline has continued to drop. In the past week, the price at the pump has gone down another 7 cents a gallon, with the national average now about $3.54 a gallon, according to AAA, the motorists’ club. The price of gas is now about 44 cents a gallon lower than its peak in May, but it’s still about 80 cents a gallon more expensive than last year.

AAA is projecting a 2.5 percent decline in Fourth of July travel compared with last year as a result of the higher fuel prices. “Increased fuel prices are also responsible for a shift in the demographics of the typical Independence Day traveler, as higher prices impact lower-income households more significantly,” says Glen MacDonell, director of AAA Travel Services.

Then again, gasoline prices have almost bottomed out for the summer, Mr. Kilduff says. “We need crude oil below $90 a barrel to sustain these levels,” he says. On Thursday, the price of crude was about $95.65 a barrel on the futures market. “The daily price declines at the pump will come to a screeching halt,” he says.

However, Emerson says, some other dynamics might keep oil prices in check in the second half. “What if Libya comes back?” she asks. “What if [Muammar] Qaddafi loses power? The opposition can get oil up and running pretty quickly.”

Once Qaddafi is gone, Kilduff says, the price of oil will fall between $3 and $5 a barrel. “I think we’ll see a resolution in Libya in the next 30 to 60 days,” he says.

Gasoline jumped to a two-week high after the Energy Department reported that U.S. stockpiles of the motor fuel fell unexpectedly last week and imports slid to the lowest level in 15 weeks.

Futures rose 4.2 percent as stockpiles dropped 1.43 barrels to 213.2 million, the biggest loss in nine weeks. The median forecast of 12 analysts surveyed by Bloomberg News was for a gain of 775,000 barrels. Daily gasoline imports dropped 21 percent to an average 683,000 barrels, the fewest since the week ended March 11.

“The market is focused on the headline inventory number,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The market doesn’t care about why it fell. The market doesn’t care about demand.”
Gasoline for July delivery rose 12.01 cents to settle at $3.0097 a gallon on the New York Mercantile Exchange, the largest gain since May 9. The more actively traded August contract gained 11.93 cents to $2.9349. July gasoline and heating oil futures expire at the end of floor trading tomorrow.

Futures were up a third day before the report as Greek Prime Minister George Papandreou won approval for the first part of an austerity plan that may ward off default and quell fears of a broader European debt crisis. The Greek Parliament passed Papandreou’s 78 billion-euro package of budget cuts and asset sales, crucial to receiving further international financial aid.

‘Sigh of Relief’

“Passage of the austerity budget will make some breathe a sigh of relief that the debt crisis would not spread throughout the euro zone and result in a slower economy throughout the region,” said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Gasoline stockpiles in U.S. East Coast, or Padd 1 region, fell 1.7 percent to 55.3 million barrels, 8.1 percent below a year earlier. Supplies of reformulated gasoline, or RBOB, in the region were 27 percent lower than in 2010, department data showed. The Nymex futures contract reflects RBOB delivered to New York Harbor.
The inventory decline came as imports and production dropped. Plants reduced refinery rates 1.1 percentage points to 88.1 percent, cutting output of the motor fuel by 4.7 percent to the lowest level in seven weeks. Imports were 34 percent below a year earlier.

‘Uneconomical’ Imports

“Brent strength is making it uneconomic to import gasoline and domestic production overall is basically flat,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. “The report is bullish because you’ve lost the import stream and domestic production hasn’t moved into the gap yet.”
Gasoline and heating oil premiums over crude oil on Nymex increased as Brent crude on the ICE Futures Europe exchange gained more than West Texas Intermediate oil. Refineries on the East Coast, where Nymex gasoline futures are delivered, primarily use oil from Europe and West Africa, which are priced versus Brent.
The August gasoline crack spread increased $3.13 to $28.50 a barrel on the exchange, while the August heating oil crack spread gained $2.04 to $28.49.

The WTI-Brent spread, based on August futures, was $17.63 a barrel, up from $15.89 yesterday.
Gasoline demand, measured by deliveries to wholesalers, fell to a three-week low of 9.26 million barrels a day. On a four-week average, consumption was 0.3 percent below a year earlier.

“Demand is dropping but gasoline is the item people are going to want to own and buy,” said Gordon Elliott, a risk management specialist at INTL FC Stone LLC in St. Louis Park, Minnesota.

Distillate Supplies

Supplies of heating oil and diesel increased 258,000 barrels to 142.3 million, a six-week high. The survey projected a rise of 1.05 million barrels. Demand for industrial, trucking and home-heating fuels climbed 3.9 percent to 3.55 million barrels a day, the first gain in five weeks.

Regular gasoline at the pump fell 0.8 cent to $3.543 a gallon yesterday, according to AAA data. That’s the lowest level since March 18.

Heating oil for July delivery rose 9.45 cents, or 3.3 percent, to settle at $2.9202 a gallon. The August contract gained 9.32 cents to $2.9347.

Oil tumbled in New York, erasing its gains for the year, after the International Energy Agency said its members would release crude from strategic reserves.

Oil fell 4.6 percent as the agency announced the release of 2 million barrels a day for 30 days beginning next week to help make up for a Libyan supply disruption. Commodities and equities dropped after U.S. jobless claims rose and the Federal Reserve cut its economic growth outlook yesterday.

“The big driver is the IEA number,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “There’s been a constant string of negative news about the economy and a lack of direction from Washington, which makes for a very volatile market.”

Oil for August delivery dropped $4.39 to $91.02 a barrel on the New York Mercantile Exchange, the lowest settlement since Feb. 18. Prices have slipped 0.4 percent this year.

Brent crude for August delivery fell $6.95, or 6.1 percent, to $107.26 a barrel on the London-based ICE Futures Europe exchange, the lowest price since Feb. 22. Prices have risen 13 percent this year.
Brent may “stabilize” around $90 a barrel for the rest of 2011 following the IEA release and increased output from Saudi Arabia, Kuwait and the United Arab Emirates, according to Citigroup Global Markets Inc. analysts Edward Morse and Aakash Doshi.

Goldman Sachs analysts David Greely and Jeffrey Currie forecast the move could reduce their three-month Brent price target by $10 to $12 a barrel to $105 to $107.

Brent Premium

Half of the 60 million barrels of crude from the IEA release will come from the U.S. Strategic Petroleum Reserve, according to the IEA and the U.S. Energy Department. Republicans joined the oil industry in criticizing the move by the Obama administration as political and said the release wasn’t needed, though more drilling is.

Brent, the European benchmark contract, traded at a premium of $16.24 a barrel to U.S. West Texas Intermediate futures today. The difference between the front-month contracts reached a record $22.79 a barrel last week amid a surplus of oil at Cushing, Oklahoma, the U.S. midcontinent hub.

“Brent is going to take a bigger hit than WTI because the SPR barrels are on the Gulf Coast, not the midcontinent,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts.

It’s only the third time in the history of the IEA the global reserves have been tapped. The first was during the 1991 Persian Gulf War, and the second was after Hurricane Katrina in 2005. The Paris-based IEA is an energy policy adviser to 28 industrialized nations including the U.S., Japan and Germany.

‘Different Game Plan’

“Markets get very nervous when a non-commercial player comes into the market, and you’re seeing that today,” Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., the world’s biggest manager of bond funds, said on Bloomberg Television’s “In the Loop” with Betty Liu. “It’s a little bit like introducing a new player on the playing field who has a different game plan completely.”

IEA Executive Director Nobuo Tanaka said at a press conference in Paris that the agency was in touch with producing nations before making its decision to tap reserves. Tanaka said he expects Saudi Arabia to increase production.

The kingdom indicated two weeks ago that it would boost output amid concern that rising prices would derail the global economic recovery. The Saudi decision came after a June 8 meeting of the Organization of Petroleum Exporting Countries at which it failed to push through a production increase.
“It would appear that officials in the main oil exporting and importing countries are combining their efforts to replace the 132 million barrels of light, sweet, Libyan crude lost since late winter,” Morse and Doshi said in their report.

Jobless Claims

Prices also fell after the U.S. Labor Department said applications for jobless benefits increased 9,000 in the week ended June 18 to 429,000. The level of claims exceeded the highest estimate in a Bloomberg News survey. The median projection called for 415,000 filings.

Fed officials yesterday cut their forecasts for growth and employment this year and next in the world’s largest oil- consuming country.

The Thomson Reuters/Jefferies CRB Index of 19 commodities declined 2.3 percent to 330.21, the lowest level since January. Sixteen of the commodities retreated.

The Standard & Poor’s 500 Index dropped 0.3 percent to 1,283.5, and the Dow Jones Industrial Average fell 59.67 points, or 0.5 percent, to 12,050.

Weaker Euro

The euro decreased against the dollar as European Central Bank President Jean-Claude Trichet said the debt crisis threatens to infect banks. A weaker euro and stronger dollar curb the appeal of commodities as an alternative investment.

The currency slipped 0.8 percent to $1.4236. Earlier, it touched $1.4127, the lowest level since June 16.
“There’s a lot of scary news in Eurrope and it’s looking like the U.S. economy will be growing at an anemic rate through the summer,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “This is not good for the demand outlook.”

Gasoline for July delivery plunged 13.57 cents, or 4.6 percent, to settle at a three-month low of $2.8376 a gallon on the Nymex. Gasoline prices at the pump slipped 1.4 cents yesterday to $3.612 a gallon, the lowest level since March 30. They have fallen 9.4 percent since peaking at a 33-month high of $3.985 on May 4.
Oil volume in electronic trading on the Nymex was 918,190 contracts as of 3:21 p.m. in New York, 69 percent above the 543,548 contracts in total electronic and floor trading yesterday. Open interest was 1.52 million contracts.

Secretary of the Navy Ray Mabus says the nation is "on the edge of another energy revolution."

When he left to be the ambassador to Saudi Arabia in 1994, no one he knew had a cell phone, Mabus said last week at a forum on energy and national security at the U.S. Naval War College in Newport, R.I. When he returned, everyone did.

The United States will move from a dependence on fossil fuels to using alternative sources for energy in much the same way that technology transformed the way people communicate, Mabus said.

"Think of iPads, smart phones. Think of how you communicate and how much that's changed in a blink of an eye. Think of the way you watch television - cable, satellite and the flat screen, which was a military innovation," Mabus said. "And it changes just like that. And I think we're about to do that on energy, too."

President Barack Obama has called for cutting U.S. oil imports by one-third by 2025 as part of a strategy to reduce the nation's dependence on fossil fuels, address global climate change and create green jobs. The Department of Defense unveiled its energy strategy Tuesday.

"We have to take care of this to be the Navy and Marine Corps that we need to be," Mabus said. "This is not just sort of one of those passing fancies. This is not just, well, that's the secretary of the Navy's stuff, and as soon as he leaves we can get on with the real business at hand here. This is our main vulnerability."

Must be home-grown

Mabus said he wants the Navy and Marine Corps to use biofuels that are domestically produced to avoid trading a dependence on foreign fossil fuels for a dependence on foreign alternative energy technology. The biofuels also must be able to mix with traditional petroleum with no adverse effects so the blended fuel can be used in the ships and aircraft that the Navy has today.

"We can't go around replacing engines and things like that," Mabus said. "It's got to work the same way."

By 2016, the Navy plans to deploy the "Great Green Fleet," a carrier strike group of nuclear-powered ships, hybrid-electric ships running on biofuel and aircraft flying on biofuel. The name is a play on the Navy's "Great White Fleet," which circumnavigated the globe from 1907 to 1909 in a show of American military power.
"This is a modern twist on the same idea - to send a powerful signal to the world that the world's most accomplished, biggest and greatest Navy to date is looking to advanced biofuels," said Tom Hicks, deputy assistant secretary of the Navy for energy.

Petroleum is the primary source of energy for the Navy and Marine Corps. Nearly 80 percent of land convoys in Afghanistan are used to carry fuel. Insurgents attacked 1,100 convoys in 2010 alone. And with rising prices, it will cost $562 million more for fuel over the next year than previously anticipated.

Starting in 2020, the Navy will need 8 million barrels of alternative fuels annually to reach its energy goals. MIT, at the Navy's request, evaluated options for biofuels including camelina, an inedible plant, and algae, and found the cost would be comparable to that of petroleum in the early 2020s.

The industry for biofuels is in its infancy, so the prices are higher and companies are not producing maritime and aviation biofuels in large quantities. The Navy, the Department of Energy and the Department of Agriculture are working together to speed up the development of the industry, Hicks said. The Navy provides a market while the Energy Department has expertise in these technologies and the Agriculture Department has connections to the farming community.

"We could sit back and wait for the market to respond to the demand signal," Hicks said. "But we choose to take a leadership position and get engaged through this partnership."

Jonathan Wolfson, co-founder of Solazyme, a California firm, said industry is "moving in the right direction" with a "lot of new technology that can be commercial in a rapid fashion." Wolfson's San Francisco-based company makes renewable oil and bio-products.

A blend of biofuel and petroleum-based fuel was successfully tested in a fighter jet, a helicopter and a Riverine Command Boat, with more tests planned over the next six months.

"For a long time, you've seen sort of self-fulfilling prophecies - 'Well, we can't get more than X percent of energy from alternative sources because we don't have this, we don't have that. We're going to be dependent on fossil fuels no matter what,'" Mabus said.

Halfway there in 2020

The goal for the Navy and Marine Corps is that by no later than 2020, half of the energy used for ships, aircraft, tanks, vehicles and shore installations must come from alternative sources. That will not happen with biofuels alone.

Another main push is seeking ways to use less energy in existing buildings and future construction projects. The new Submarine Learning Center at the Naval Submarine Base in Groton is heated using geothermal energy.

The Navy is phasing in vehicles that are hybrid, electric or flex fuel, a combination of ethanol and gasoline or diesel and biodiesel. It is using solar power on bases and studying how to harness the energy of water and wind power. The Marine Corps is experimenting with solar technology for the field, since producing energy in remote locations comes with a unique set of challenges.

Sarah Emerson, an energy analyst, sees more of a gradual change to these technologies than an energy revolution for market reasons. The price of oil would have to stay high for a long time for investors to really focus on alternative energy, she says.

The Navy, as a big buyer with perfect credit, "is helpful but it's not a silver bullet," she said. The government could pursue policies, from taxes and subsidies to mandates, to promote alternative energy over fossil fuels since the market is "not necessarily sending the right signals," added Emerson, president of Energy Security Analysis Inc. in Wakefield, Mass.

Mabus said the Navy has always been at the forefront of innovation when it comes to energy, moving from sail to coal in the middle of the 19th century, from coal to oil in the early 20th century and to nuclear in the middle of the 20th century.

"Every single time we did that, every time, there were a lot of folks who said, 'What a mistake. What are you doing?'" he said. '"You're trading something that you know works, you're trading something that you know how to deal with, we know how to operate with, and you're moving us into something new that's unproven.' "
These naysayers, Mabus said, were wrong every time, and "they're going to be wrong this time, too."

Gasoline sank to a four-week low as two manufacturing reports indicating the economic recovery has stalled sent stocks tumbling and as a surging dollar reduced the investment appeal of commodities.

Prices lost the most in four weeks as U.S. industrial output rose less than forecast in May and manufacturing in the New York region unexpectedly dropped. The U.S. currency reached the highest level against the euro this month on concern Greek’s debt crisis threatens Europe’s economic health.

“The market is refocused on the Greece debt problem, which sent the euro tumbling and brought out sellers in the market, and there’s growing worries about the economic recovery stalling,” said Gene McGillian, an analyst and broker at Tradition Energy in Stamford, Connecticut.

Gasoline for July delivery declined 14.11 cents, or 4.6 percent, to settle at $2.9235 a gallon on the New York Mercantile Exchange.

The Standard & Poor’s 500 Index slid 1.7 percent to 1,265.42, and the Dow Jones Industrial Average dropped 1.5 percent to 11,897.27.

“This is just another global stock market meltdown precipitated by the Greek crisis and, of course, the dollar got a lot stronger,” said Fred Rigolini, vice president of Paramount Options Inc. in New York and a trader at the New York Mercantile Exchange.

Dollar Rises

The dollar gained 1.9 percent to $1.4164 against the euro at 3:18 p.m. in New York, the biggest increase since May 5, after European officials failed to break a deadlock on creating a second rescue plan for Greece.
Futures and equities extended losses and the dollar widened gains after Greek Prime Minister George Papandreou said he will make changes to his Cabinet tomorrow and will then immediately seek a vote of confidence in Parliament.

Gasoline was the third-biggest loser today on the Thomson Reuters/Jefferies CRB Index of 19 commodities. The index retreated 2.3 percent as of 3:30 p.m. in New York as 16 of 19 commodities declined.
“This is all being currency-driven and that is about concern about the European debt crisis,” said Tom Knight, vice president of trading and supply at Truman Arnold Cos. in Texarkana, Texas. “As a result, most of the dollar-denominated markets moved sharply lower.”

Factory Output

Output at U.S. factories, mines and utilities rose 0.1 percent after no change the prior month, figures from the Federal Reserve showed today. Economists projected a 0.2 percent gain, according to the median estimate in a Bloomberg News survey.

The Federal Reserve Bank of New York’s general economic index dropped to minus 7.8, the lowest level since November, from 11.9 in May. The median forecast in a Bloomberg News survey of economists was 12.
Prices also fell after the U.S. Energy Department reported at 10:30 a.m. in Washington that gasoline supplies rose less than expected.

Stockpiles of gasoline increased 573,000 barrels to 215.1 million in the week ended June 10, the report showed. The median forecast of 14 analysts surveyed by Bloomberg News was for a gain of 1.05 million barrels.

“Economic concern is No. 1 and the unsure demand we have for the rest of the summer as we’re building supplies,” said Gordon Elliott, a risk management specialist at INTL FC Stone LLC in St. Louis Park, Minnesota.

Gasoline Demand

Gasoline demand jumped 2.3 percent to 9.37 million barrels a day. The four-week average rose to 9.25 million, 0.5 percent above a year earlier.

The July gasoline crack spread on Nymex narrowed $1.36 to $27.98 a barrel.

“The crack spread is down mostly because of the crude draw,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. “If refiners are using it, there is going to be more domestic gasoline coming into the market.”

Oil inventories fell 3.41 million barrels to 365.6 million, more than the 1.8 million-barrel drop projected in the survey. Supplies at Cushing, Oklahoma, the delivery point for Nymex crude futures, fell to the lowest since February.

Regular gasoline at the pump declined 0.7 cent to $3.689 yesterday, according to AAA data on its website, the lowest level since April 4.

Heating oil for July delivery slipped 14.1 cents, or 4.5 percent, to settle at $2.9848 a gallon on the Nymex, the lowest level since May 26.

Distillate Supplies

Supplies of heating oil and diesel declined 105,000 barrels to 140.8 million, the report showed. The survey projected an increase of 1 million barrels. Distillate demand sank 5.2 percent to 3.6 million barrels a day, a 5-month low. Exports rose 183,000 barrels to 854,000 barrels a day last week, according to the department.
“There’s a relatively mild draw in diesel inventories and a big drop in demand, so it’s got to be going outside the country,” Cohan said.

Natural gas futures turned lower Thursday, wiping out earlier gains, after a government report showed inventories rose more than expected last week.

Natural gas for July delivery recently fell 4.7 cents, or 1%, to $4.80 a million British thermal units on the New York Mercantile Exchange. The contract earlier traded as high as $4.983, the highest intraday price since Aug. 2.

Futures reversed course after the U.S. Department of Energy said U.S. gas stockpiles rose by 80 billion cubic feet last week, higher than the 77-bcf build expected from analysts surveyed by Dow Jones Newswires.
"A sell off or correction has pretty much been telegraphed very well," said Chris Kostas, senior analyst at Energy Security Analysis Inc.

The report gave traders a reason to end a three-day run of higher end-of-day prices. The benchmark contract looked poised to break the $5 threshold prior to the report's release, swept higher in recent sessions by a bout of hotter-than-normal temperatures in the Northeast and the start of hurricane season.

There is little sign the unseasonably warm weather will dissipate soon. Forecaster Energycast Trader said it sees above-normal temperatures across the southern U.S. over the next six to 10 days. For its 11-to-15-day forecast, the private forecaster said higher-than-usual temperatures will continue in the south, as well as the central U.S.

Still, traders had been looking for the heat to prompt a smaller build in gas inventories, spurred by higher demand from power plants that use gas to fuel air conditioner use.

Thursday's unexpected inventory reading may have been prompted by a bigger-than-expected drop in demand over the Memorial Day weekend or higher nuclear plant operating rates, said Tim Evans, energy analyst at Citi Futures Perspective.

"The 80 bcf net injection was bearish relative to expectations and extends a pattern of week-to-week surprises ... the last three weeks," Evans wrote in a research report.

Last week's inventory build, though bigger than expected, was still well below last year's 98-bcf injection and the five-year average build of 96 bcf.

Inventories as of June 3 stood at 2.187 trillion cubic feet, 2.6% below the five-year average, and 10.4% below 2010 levels, the DOE's Energy Information Administration said.

Meanwhile, natural gas for next-day delivery at the benchmark Henry Hub in Louisiana recently traded at $4.92/MMBtu, according to IntercontinentalExchange, up 6 cents from Wednesday's average. Natural gas for Friday delivery at Transcontinental Zone 6 in New York traded at $5.70/MMBtu, down from $7.30/MMBtu a day earlier.

When Adm. Gary Roughead sees the price of oil rise by $1 per barrel, he knows it will cost the Navy an additional $33 million for fuel.

Roughead, chief of naval operations, and other speakers at the U.S. Naval War College's forum on energy and national security Tuesday, agreed that the nation's dependence on oil is untenable, given the cost, demand and finite supply.

They differed, however, on what should be done and how soon.

Amory B. Lovins optimistically told the audience that the nation could shift from oil and coal to efficient use and renewable energy by 2050, led by the business sector and facilitated by the military. Lovins is co-founder of Rocky Mountain Institute, an independent nonprofit focused on the efficient and restorative use of resources.
"Reinventing fire" is the institute's name for its strategy, detailed in a book to be released this fall, to make the drastic change that Lovins estimated would save more than $5 trillion and alleviate the security, climate and financial risks associated with fossil fuels.

Vehicles use most of the oil on which the country spends $2 billion a day, and the government could encourage consumers to buy lighter, fuel-efficient cars with a rebate program, paid for with a fee on inefficient cars, he said.

The military has a vested interest since the cost of delivering fuel to the battlefields in Afghanistan is one-fifth to one-third of the cost of the war there, Lovins said, adding that 1,000 service members have been killed in Afghanistan and Iraq in convoy attacks in the past decade, mainly transporting fuel. New "ultra-light" armored vehicles protect better than current ones, and naval ships and airplanes can be designed to use less fuel and electricity, Lovins concluded.

"This would speed innovation in civilian vehicles, which use 50-odd times more oil, helping move the nation and the world beyond oil so we don't need to fight over it," he said.

Sarah Emerson, president of Energy Security Analysis Inc., based in Wakefield, Mass., said in a panel that she agreed with Lovins' view, that it's "something we should get to," but that she was "not entirely sure we will."
"In the meantime we will stay in the world of fossil fuels, diminishing in size but still critical," she said, adding that this comes with a greater chance of energy-related conflict.

It takes 83 trucks per day to bring bottles of water to the Marines in Afghanistan, and a battalion there will use 6,000 pounds of non-rechargeable batteries, said Marine Corps Lt. Gen. George J. Flynn, commanding general of the Marine Corps Combat Development Command.

Flynn said the Marines are beginning to cut down on the amount of water that needs to be transported and use solar panels to recharge batteries, but these changes will help "control the demand but not necessarily solve the problem." Armored vehicles are 3,000 to 5,000 pounds heavier, using more fuel, he added, "not because we want them to be but because they protect Marines and sailors" from roadside bombs.

"It's all about war fighting to us," he said, adding that the light vehicles are also five to six times more expensive.

The Navy is making ships more hydro-dynamic, both through their shape and coatings, to travel through the water more easily and save on fuel, as well as using hybrid-electric drives in some ships and insulating buildings on bases to make them more efficient.

Roughead said a main challenge to the alternatives to oil is the price.

"The Navy as a single service, a single entity, is not going to drive the market," he said. "And so what we are doing is making sure we are ready so when the market turns, we know it will work."

Crude oil fell, capping the biggest weekly decline in a month, as the U.S. jobless rate climbed to the highest level this year, adding to concern that a slower economic recovery will curb oil demand.

Oil dropped 0.2 percent after the Labor Department said payrolls rose by 54,000 in May, the smallest gain in eight months. The median forecast in a Bloomberg News survey called for a 165,000 increase. The unemployment rate advanced to 9.1 percent from 9 percent a month earlier.

“The economy is slowing down, so oil demand is going to slow down,” said Carl Larry, director of energy derivatives and research at Blue Ocean Brokerage LLC in New York. “That’s going to be your main concern.”
Crude oil for July delivery fell 18 cents to settle at $100.22 a barrel on the New York Mercantile Exchange. Prices declined 0.4 percent this week, the biggest drop since the five days ended May 6.

Brent crude for July delivery rose 30 cents, or 0.3 percent, to $115.84 a barrel on the London-based ICE Futures Europe exchange.

The European benchmark contract traded at a premium of $15.62 a barrel to U.S. futures, up 48 cents from yesterday. The difference between front-month contracts in London and New York reached a record $19.54 on Feb. 21. The spread averaged 76 cents last year.

Economic Outlook

Oil may fall in New York next week amid signals that jobs growth and manufacturing in the U.S., the world’s biggest oil- consuming country, are struggling to rebound, a Bloomberg News survey showed.
Sixteen of 34 analysts, or 47 percent, forecast oil will decline through June 10. Eight respondents, or 24 percent, predicted prices will climb and 10 estimated little change.

“There is a lot of pessimism over the economy, and the jobs report feeds into it,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts.

Factories in the U.S. cut payrolls in May for the first time in seven months, a Labor Department report showed. Employment at retailers, leisure and hospitality companies and state and local governments also decreased during the month.

Jobs at factories declined by 5,000, compared with the survey forecast of a 10,000 increase. Private hiring, which excludes government agencies, rose 83,000 last month. It was projected to climb to 170,000, the survey showed.

Slower Growth

U.S. economic growth slipped to a 1.8 percent annual pace in the first three months of the year from 3.1 percent in the prior quarter, revised figures from the Commerce Department showed last week.
“The jobs report is really putting a damper on the momentum,” said Phil Flynn, an analyst with PFGBest in Chicago. “Demand is obviously going to be weak, and supply has been at a very high level.”

Crude oil inventories rose 2.88 million barrels to 373.8 million in the week ended May 27, the highest level since May 2009, the Energy Department said yesterday.

Supplies of gasoline increased for a fourth week, climbing by 2.55 million barrels to 212.3 million, the department said.

Gasoline futures fell 2.54 cents, or 0.9 percent, to $2.9931 a gallon on the Nymex.

The Organization of Petroleum Exporting Countries will respond at its June 8 conference in Vienna if the world needs more crude, Saudi Arabian Oil Minister Ali Al-Naimi said yesterday.

OPEC Production

OPEC will probably maintain production levels for an eighth consecutive meeting, resisting calls to ease the pressure of $100-a-barrel oil on the global economy, according to a survey of analysts by Bloomberg News.
OPEC’s output rose 165,000 barrels, or 0.6 percent, to average 28.895 million barrels a day in May, according to a Bloomberg News survey of oil companies, producers and analysts. Saudi Arabia bolstered production by 75,000 barrels, or 0.8 percent, to 8.925 million barrels a day, the highest level since October 2008.
Crude pared earlier losses as the dollar weakened to the lowest level against the euro in almost a month after Greece was approved for more assistance to address its debt crisis.

European Union and International Monetary Fund officials agreed to pay the next installment to Greece under last year’s 110 billion-euro ($161 billion) bailout.

Euro Strengthens

The euro advanced 0.9 percent to $1.4618 as of 3:14 p.m. in New York after climbing to $1.4643, the strongest level since May 5. A decline in the U.S. currency makes dollar-priced assets such as crude appear cheaper to investors using other currencies.

“The weaker dollar does offer a little bit of support to oil,” said Barber.

Oil volume in electronic trading on the Nymex was 640,248 contracts as of 3:14 p.m. in New York. Volume totaled 785,925 yesterday, 17 percent above the average of the past three months. Open interest was 1.52 million contracts.

The rush by Americans to buy smaller, more fuel-efficient cars hit a speed bump in May.

New data compiled for Reuters shows the rush for vehicles with higher gas mileage is more restrained than three years ago, and is already beginning to fade, even as gasoline prices test their 2008 peaks and automakers tout an expanded line-up of gas-sipping cars, from plug-in Volts to 6-cylinder F-150s.

In May, the average fuel economy of new US light vehicles actually fell for a second consecutive month to the lowest since January, even though gasoline prices only began to subside in the past few weeks, according to preliminary figures from online car-buying research website TrueCar.com.

That means that since January, average mileage has risen by just 1.4 per cent to 21.9 miles per gallon; over the same period in 2008, it jumped by six per cent to 21.2 mpg, according to TrueCar data compiled exclusively for Reuters. The firm will release its official May mileage figures next week.

To be sure, the slower rate of growth may be partly caused by the significant increase in overall efficiency in the intervening three years, a trend that has helped put a lid on gasoline use in the world's biggest oil consumer. Average efficiency is up by two mpg since the start of 2008.

And May sales also may have been influenced by the March 11 earthquake in Japan. Dealers had fewer cars on their lots last month with the Japan crisis keeping an estimated 40,000 new, smaller cars off the market, said Edmunds.com.

Even so, the sales trend jibes with other indications that the gas price required to change the behaviour of US consumers has risen over recent years, suggesting that world oil prices may have greater room to rise before they erode demand.

"By November of 2008, everybody had already gotten over $US4 a gallon and were back to their old ways. It was a panic situation, people overreacted," AutoNation Inc Chief Executive Mike Jackson said. "People now feel they've already seen the movie. They've adjusted to it."

The price at which most car buyers would begin panicking and adjusting their buying behaviour -- what Jackson calls the "freak-out number" -- has moved to $US5 a gallon from 2008's $US4.

This year's rise and fall in fuel economy mirrors the trend in 2008, when gasoline prices followed a similar pattern, and suggests that consumers may quickly revert to their vehicle of choice after a quick dash for more-efficient purchases.

Back then, sales of vehicles with higher gas mileage jumped from February through May, but declined thereafter, even before gasoline peaked in early July, according to the data. While the correlation is debatable, the outcome is important.

The industry's May fuel efficiency of 21.9 mpg was a retreat from April's 22.2 mpg, according to the TrueCar data based on actual sales and the Environmental Protection Agency's mileage ratings.

Drivers like Sara Lawler, a 42-year-old mother of four who drives a Suburban SUV, underlined the point.

"I drive this because I like the space and I've got a lot of kids," she said while filling up at a gas station near Whitestown, Indiana. "I'm not going to switch to a little toy box just because it doesn't use as much gas."

One MPG = 27,000 barrels a day

Improving the efficiency of new car purchases won't wean the United States off imported oil any time soon. But it may be an important indicator of consumer psychology that also affects how Americans drive, a much bigger factor for markets.

In practical terms, the fuel savings are small but not insignificant. TrueCar estimates that a 1-mpg improvement in estimated sales of 13 million vehicles would reduce consumption by 416 million gallons, or nearly 10 million barrels of oil.

That's equivalent to only about a day's worth of gasoline consumption in the United States. In trader terms it would shave about 27,000 barrels per day (bpd) off consumption; that would be enough to wipe out the expected rise in demand this year of just 16,000 bpd -- out of a total 10 million bpd.

Long-stalled fuel-economy standards have long been cited as one of the reasons that US gasoline consumption has grown quickly; regulated Corporate Average Fuel Economy (CAFE) figures flatlined through most of the 1980s and 1990s up until 2005, as oil prices rose to $US50 and beyond.

But the DOT expects sales-weighted CAFE figures to fall this year for the first time in five years, reinforcing the idea that it may take another significant jolt before more Americans shift away from their gas-guzzlers.

CAFE figures differ signficantly from the TrueCar mpg figures due to the different ways of calculating efficiency.

"In general, gasoline demand is inelastic as prices fluctuate so consumers don't really change their (vehicle) purchases in the short term," says Sarah Emerson of Energy Security Analysis Inc (ESAI).

"People make a decision to buy a car every 10 years. If they believe prices are never going below $US3 a gallon, their decision will lean toward more fuel efficient cars...but I'm not convinced that these numbers -- mileage and prices-- track each other" on a short-term basis.

Other indicators suggest consumers are taking this year's price rise in stride. Americans likely took just as many driving holidays this past Memorial Day weekend as they did a year ago, according to a AAA forecast.

The recent decline in average gasoline prices to the lowest in seven weeks may have helped, but at $US3.79 a gallon, according to the Energy Department, gas is still $US1.07 higher than a year ago.

'Super-size me' not

That said, no one expects May's disenchantment with smaller and more efficient vehicles to reverse the broader trend toward cars that will go further on a gallon of gas.

For one thing, federal standards imposed last year require automakers to achieve a fleet average of 35.5 mpg by 2016, and the Obama administration may double that by 2025.

For another, even the most bearish oil analyst doesn't envision another abrupt collapse in prices that would pull gasoline back under $US2 a gallon.

In May 2008, the market for small and subcompact cars surged to almost 27 per cent, according to Edmunds. However, as the pain at the pump eased -- prices fell to $US1.61 a gallon by year end -- Americans returned to pickup trucks and sport-utility vehicles and the smaller cars saw their share slip back to 17.5 per cent by December.

But more importantly times have changed, thanks to an improving economy, an expanding credit market, strong resale values for used vehicles and a far greater selection of cars that get over 30 and 40 miles per gallon, something that was more rare in 2008, analysts said.

"Before, they were stupid, dumb econoboxes that consumers bought purely for the price point or fuel efficiency," AutoNation's Jackson said. "Today, they're beautiful, exciting designs with great driving dynamics."

Even buyers unwilling to compromise their aesthetics or space are finding better options among more-familiar models.

More than half of the sales of Ford Motor Co's best-selling model, the F-150 pickup truck, included V-6 engines in May. At the beginning of the year, Ford only sold V-8s in those trucks.

GM dumped 26 lbs of spare tire and jacking equipment on its new Chevy Cruze compact in favour of a tire inflater kit. And 41 per cent of the company's May sales sported 4-cylinder engines, up from 26 per cent a year ago.

AutoNation's Jackson pointed out almost half the vehicles sold in May were powered by 4-cylinder engines, something he called unbelievable. In 2005, that share was about 30 per cent.

Consumers will not completely turn back the clock to revert to their old habits.

"That shock that happened in 2008 sort of jolted people back to the reality of 'Fuel prices, I can't count on them being $US2 a gallon forever,'" said Margaret Brooks, the marketing director for General Motors Co's Chevrolet Sonic subcompact car launching this fall.

Consumers are now prioritising needs "instead of super-sizing everything," she added.

The first known shipment of oil from rebel-controlled east Libya is on its way to a refinery in Hawaii after sitting without a buyer off the coast of Singapore for weeks.

San Antonio-based Tesoro Corp. (TSO) bought the cargo in late May for its refinery in Kapolei, Hawaii, company spokesman Mike Marcy told Dow Jones Newswires on Thursday.

Shipping brokers estimate the tanker is expected to arrive on June 6, two months after it loaded in the rebel-controlled port of Tobruk. That the cargo took so long to find a buyer is the latest indication of how deeply the rebellion against Col. Moammar Gadhafi has severed Libya's oil from the global market. Where the North African nation was exporting 1.6 million barrels a day before fighting began in mid-February, almost no oil has made it out since.

The Libyan government is barred from exporting oil under international sanctions, and rebels have had a hard time producing crude and sending it out due to harassment by forces loyal to Gadhafi.

Refiners are likely to have a long wait for the next shipment of Libyan crude, as neither Gadhafi nor the rebels appear close to gaining the upper hand. Libya's top oil official said Wednesday that he had defected from Gadhafi's regime, and international oil companies operating in the country pulled their employees soon after fighting began.

"It's a clear stalemate," said Sarah Emerson, analyst and principal at energy consultancy ESAI Energy LLC. "We don't see any other crude coming out of there, although this is one of those things that could change very quickly."

The Equator, a tanker capable of carrying 1 million barrels of oil, was contracted by Vitol Group, and had sat in Singapore for a month after leaving Libya.

Tesoro became interested in the cargo for its Kapolei refinery after a shipment of South American crude fell through in late April, Marcy said in an email.

"Obviously, there are unique geopolitical attributes to this particular cargo, " he said, adding that the purchase was made in "strictest accord" with the ban on purchasing oil from Gadhafi's regime.

Marcy declined to give the price Tesoro paid for the shipment.

The price of Brent, a North Sea oil blend that tends to cost roughly the same as Libyan crude, traded between $110 and $125 a barrel in May on ICE Futures Europe.

Vitol was unavailable for comment and the vessel's Greek managers, Dynacom Tankers Management Ltd., declined to comment.

The sanctions imposed by the U.S. on Venezuela's national oil company for trading with Iran amount to a slap on the wrist, with no damage to the energy trading that links the U.S. and Venezuela, analysts say.

The sanctions were imposed by the State Department Tuesday to punish seven foreign energy companies that provided gasoline and other refined petroleum products to Iran in violation of the 1996 Iran Sanctions Act, put in place to pressure the country to drop its nuclear program. The new sanctions will bar Petroleos de Venezuela S.A. (PdVSA) from bidding on U.S. government contracts, receiving financing from the U.S. Export-Import Bank or obtaining U.S. export licenses, but will not affect its U.S. crude imports from Venezuela or Citgo Petroleum Corp., the huge fuel-refining business it owns here, according to U.S. officials.

The actions seemed negative on the surface but "are fairly inconsequential," Nomura analyst Boris Segura said.

Currently, Venezuela is the fifth-largest supplier of crude to the U.S., having sent nearly 1 million barrels per day in February, according to the U.S. Energy Information Administration. The Citgo refineries can churn out up to 750,000 barrels a day of fuel, or 4.2% of the petroleum products consumed in the U.S. PdVSA also co-owns the 350,000 barrel-a-day Hovensa refinery in the Caribbean, along with Hess Oil Corp. (HES), and the 192,000 barrel-a-day Chalmette Refining LLC plant, along with Exxon Mobil Corp. (XOM).

Giving the sanctions tooth would have been "inopportune" due to the high prices U.S. drivers are currently paying for fuel and the tight conditions of the oil market, Segura said.

The sanctions follow more than a decade of bickering between left-leaning Venezuelan president Hugo Chavez and successive administrations in Washington. At times Chavez has vowed to stop exporting oil to the U.S. if there were an attempt on his life, and has floated the idea of selling Citgo. The U.S. and Venezuela once mutually expelled their ambassadors only to reinstate them later. But despite the heated rhetoric that flares periodically, the tight energy links continue.

Citgo, for example, has offered free or discounted heating oil to poor and elderly residents in the northeastern U.S., making those residents beneficiaries of Caracas. And the U.S., despite being demonized by Chavez, remains Venezuela's largest trading partner.

The U.S. needed to fire a warning shot against those trading with Iran, which the U.S. accuses of developing nuclear weapons despite international treaties and supporting terrorist organizations, analysts say. Chavez sees in fellow OPEC member Iran a political ally against perceived U.S. hegemony.

But the fear of disrupting the easy flow of energy into the U.S. may have weakend the sanctions' potency. By focusing on access to government contracts and financing, the new government sanctions would have next-to-no impact on PdvSA's oil and refining activities, said Sarah Emerson, principal at energy consultancy ESAI Energy LLC.

"My instinct is that this more an expression of the U.S. desire to squeeze Iran on gasoline imports," Emerson said of the company's involvement in government financing and loans. Iran has to import large amounts of gasoline due to the explosive demand generated in the last decade by a booming economy and fuel subsidies.

The Venezuelan government has yet to issue a response to the sanctions. Oil Minister Rafael Ramirez canceled a press conference on the subject earlier Tuesday.

Crude oil rose as U.S. equities increased and the dollar dropped against the euro, bolstering the appeal of raw materials to investors.

Futures climbed 0.8 percent after the Standard and Poor’s 500 Index advanced, led by a gain in commodity companies. The U.S. currency slipped from the highest level versus the euro since April 1. Oil retreated earlier when the International Energy Agency cut its global demand estimate for this year by 190,000 barrels a day, or 0.2 percent.

“Oil climbed as the S&P 500 rebounded,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “The correlation between the two is alive and well. Investors look at the S&P as a sign of where the economy is going.”

Crude oil for June delivery increased 76 cents to settle at $98.97 a barrel on the New York Mercantile Exchange. The contract dropped as much as 3 percent and climbed 2.3 percent today. Prices are up 31 percent from a year ago.

Brent oil for June settlement increased 41 cents, or 0.4 percent, to end the session at $112.98 a barrel on the London- based ICE Futures Europe exchange.

Oil volume in electronic trading on the Nymex was 851,811 contracts as of 3:20 p.m. in New York. Volume totaled 1.02 million yesterday, 40 percent above the average of the past three months. Open interest climbed to a record 1.664 million contracts.

“Open interest increases along with volatility,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “It’s a sign that this is a hot market and investors are expecting movement. Up or down it really doesn’t matter, they plan to profit from the moves.”

Stock Market Gains

The S&P 500 Index increased 0.5 percent to 1,348.08 at 3:20 p.m. after dropping as much as 0.8 percent to 1,332.03. The Dow Jones Industrial Average gained 0.5 percent to 12,695.12 after a 0.7 percent loss earlier today.

The dollar fell 0.3 percent against the euro to $1.4237 after increasing to $1.4124 earlier today.
Oil tumbled 15 percent last week, the biggest decline in two years, following the death of Osama bin Laden and a 3.4 percent gain in the U.S. currency.

“The dollar took a hit again today,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. “After such a big selloff as we’ve seen, the market is vulnerable to a bounce.”
Citigroup today revised down its three-month Brent crude forecast to $110 a barrel and for West Texas Intermediate, the grade traded in New York, to $100.

‘Renewed Concerns’

“Renewed concerns about U.S. growth, rising U.S. crude oil inventories and stretched speculative long positioning support our revisions,” a team led by London-based Guillermo Felices wrote in a report today.
U.S. crude oil inventories rose 3.78 million barrels to 370.3 million last week, the highest level since May 2009, an Energy Department report showed yesterday. Gasoline stockpiles unexpectedly increased 1.28 million barrels to 205.8 million, the first gain in 12 weeks.

Gasoline demand fell 1.3 percent to 8.83 million a day last week, the lowest level since the seven days ended February 11, according to the department.

Fuel demand in North America will decline this year by 190,000 barrels to 23.7 million a day, the Paris-based IEA said. The agency lowered its forecast for the region by 220,000 barrels a day from last month’s report, citing lower growth projections from the International Monetary Fund.

High Pump Prices

“High gasoline prices are scaring off some incremental demand,” said Rick Mueller, a principal with ESAI Energy, LLC in Wakefield, Massachusetts. “We’re going to see people conserve more and cut down on trips.”
Gasoline declined for a second day on falling demand, rising stockpiles and speculation refineries will escape damage from the swollen Mississippi River. The fuel surged 6.1 percent on May 9, the most since July 2009, on concern production and distribution would be crippled by the flood.

“A refinery catastrophe got priced into the gasoline market prematurely,” Kilduff said. “The gains are now being given back.”

Gasoline for June delivery dropped 5.89 cents, or 1.9 percent, to settle at $3.0639 a gallon in New York. Yesterday, the fuel decreased 7.6 percent, the biggest single-session fall since Feb. 17, 2009.
Regular gasoline at the pump, averaged nationwide, rose 2.2 cents to $3.984 a gallon yesterday, AAA said on its website. The price climbed to $3.985 on May 4, the highest level since July 24, 2008.

Crude oil rose above $102 a barrel in New York, rebounding from the biggest weekly decline since 2008, on signals that the global economic recovery remains intact.

Futures climbed 5.5 percent, the most in more than two months, after a report today showed German exports surged to a record in March and the U.S. Labor Department said last week that payrolls expanded. Prices also advanced on concern that a rising Mississippi River will flood Louisiana refineries.

“Some of the economic news has been stronger than expected, reducing worries about demand,” said Rick Mueller, a principal with ESAI Energy LLC in Wakefield, Massachusetts. “The Mississippi floods are increasing concern about disruptions, especially of the products.”

Crude oil for June delivery rose $5.37 to settle at $102.55 a barrel on the New York Mercantile Exchange, the biggest one- day gain since Feb. 22. Futures dropped 15 percent in the five days ended May 6, the largest weekly decline since December 2008. Prices are up 37 percent from a year ago.

Brent crude for June settlement increased $6.77, or 6.2 percent, to $115.90 a barrel on the London-based ICE Futures Europe exchange.

German exports, adjusted for work days and seasonal changes, jumped 7.3 percent from February, when they gained 2.8 percent, the Federal Statistics Office in Wiesbaden said. Economists had forecast a 1.1 percent increase, according to the median of 10 estimates in a Bloomberg News survey. Exports were worth 98.3 billion euros ($141.4 billion) in March, the most since records began in 1950, the statistics office said.
U.S. payrolls expanded by 244,000 last month, the biggest gain since May 2010, after a revised 221,000 increase the prior month, the Labor Department said May 6 in Washington.

Gasoline Surges

Gasoline advanced the most in 21 months on speculation that rising water levels in the Mississippi River may threaten production at some refineries along the river.

“In an extreme scenario, you may get flooding in refineries, which in the short term may boost the price of gasoline,” said Richard Ilczyszyn, a market strategist at Lind- Waldock, a broker in Chicago. “That would be my only concern here in the States with supply disruptions.”

The Mississippi, the largest U.S. river system, is forecast to crest today in Memphis, Tennessee, just below its 74-year-old record.

Louisiana Refineries

The water has the potential to close oil operations in the New Orleans-to-Baton Rouge region, which has 11 refineries with a combined capacity of 2.5 million barrels a day, or 13 percent of U.S. output, said Andy Lipow, president of Lipow Oil Associates LLC in Houston.

Gasoline futures for June delivery gained 18.83 cents, or 6.1 percent, to settle at $3.2784 a gallon on the Nymex. The percentage gain is the biggest since July 30, 2009. “You’re seeing some bottom-fishing today as confidence returns to the commodity markets,” said Tom Bentz, a broker with BNP Paribas Commodity Futures Inc. in New York.

Gains in oil followed commodities’ broad rebound after last week’s decline. The Standard & Poor’s GSCI Index of 24 commodities gained 3.7 percent after tumbling 11 percent last week, the biggest weekly loss since December 2008. Silver futures rose 5.2 percent to $37.116 an ounce in New York after slumping 27 percent last week.

Commodity Recovery

Goldman Sachs Group Inc., which forecast the plunge, predicted a possible recovery in commodity prices.
“Given the magnitude of the pullback, it does create an opportunity for more upside potential, particularly in the second half of this year, when fundamentals are expected to tighten,” Jeffrey Currie, the London-based head of commodity research at Goldman, said in a May 6 interview.

JPMorgan Chase & Co. raised its oil-price forecasts because OPEC and other producers aren’t matching rising demand and consumers will take time to react to higher prices.

The bank boosted its 2011 Brent crude forecast to $120 a barrel from $110, and changed its estimate for West Texas Intermediate crude, the grade traded in New York, to $109.50 from $99.

“While financial bushfires or perhaps a rapid resolution to the Libyan civil war could radically alter market dynamics, the balance of both risks and fundamentals still points to a supply constrained world,” JPMorgan analysts led by New York- based Lawrence Eagles wrote in a report on May 6.

Hedge funds were caught with bullish bets near record highs last week as oil in New York plunged.
Large speculators reduced net-long positions by 2.4 percent to 293,823 futures and options in the seven days to May 3, according to the U.S. Commodity Futures Trading Commission’s weekly Commitments of Traders report. That’s still within 5.7 percent of a record reached in March.

Oil volume in electronic trading on the Nymex was 813,856 contracts as of 3:11 p.m. in New York. Volume totaled 1.06 million on May 6, 44 percent above the average of the past three months. Open interest was 1.65 million contracts.

The US dollar surged and the price of oil dropped immediately with news US Navy SEALs shot and killed Osama bin Laden, the most famous terrorist, in a brief raid May 1 on his hideout near a military academy in Pakistan, but analysts expect the event will little change oil markets.

The US Central Intelligent Agency pinpointed bin Laden’s custom-built hideaway, and a top Navy counter-terrorism team was dispatched by helicopter in a 40-minute raid that also killed three other men, one of whom was identified as one of bin Laden’s sons. Officials said bin Laden was shot fatally in the head as he and the others resisted. The raiders evacuated his body, which was positively identified by DNA tests before burial at sea. US President Barack Obama announced bin Laden’s death, saying, “Justice has been done.” Government officials said they expect terrorist reprisals.

Not surprisingly, the Hamas terrorist organization called bin Laden a “holy warrior” and condemned his killing. But many people in Israel and the US celebrated his death, including large crowds outside the White House and at Ground Zero of the Twin Towers, scene of the Sept. 11, 2001, attack in New York.

In Houston, however, analysts at Raymond James & Associates Inc. said bin Laden’s death likely would have little effect on crude prices, which were declining in early trading May 2 while natural gas and the equity markets were on the rise. Bin Laden was not even “near the top” of the list of many geopolitical risks to oil supply, they said.

“While bin Laden's strident hatred of the Saudi royal family and other pro-western Arab regimes is well known, in the grand scheme of things it was a relatively minor destabilizing factor,” said Raymond James analysts. “Currently, what is unambiguously at the top of the list of oil market concerns is the tension between the Arab ‘street's’ demands for political and social reform and most Arab leaders' stubborn refusal to offer that reform. Bin Laden, and al Qaeda more broadly, are definitely not the cause of the Arab revolutions, and therefore bin Laden's death does not weaken the revolutionary fervor.”

Others ‘more relevant’

They said, “If Libya's [Moammar] Gadhafi or [Syrian president Bashar al-Assad] were to depart the political scene, that would have significantly more relevance for the oil market than the bin Laden news.”

At Energy Security Analysis Inc., Wakefield, Mass., officials said, “The implications for the oil market are unclear. To the degree that [bin Laden’s death] weakens the terrorist threat in oil producing countries and underscores the effectiveness of US covert operations, we could see the dollar strengthen and commodities weaken. On the other hand, to the degree this event spawns a wave of poorly planned but destructive terrorist attacks, it could increase the risk premium in oil prices.” They added, “We believe bin Laden’s death is a significant blow to the global jihad of al Qaeda.”

Reliance Industries Ltd. (RIL), India’s biggest company by market value, may see profit growth slow as earnings from processing crude oil drop from a two-year high, investors said.

The shares fell the most in five weeks as earnings missed estimates following a drop in natural gas output. The company’s 14 percent increase in net income in the three months ended March 31 to 53.8 billion rupees ($1.2 billion) was the least in six quarters. The average estimate of 18 analysts in a Bloomberg survey was 54.3 billion rupees.

Refining margins at Reliance, controlled by billionaire Mukesh Ambani, rose 23 percent in the quarter and helped counter an 8 percent decline in earnings from exploration. That may change as refineries in Japan and China ramp up output, adding supply and reducing profitability of turning crude into fuels. Reliance runs the world’s largest refining complex and got 87 percent of its revenue last year from processing oil.

Reliance sold 30 percent in 23 oil and gas areas to BP Plc to boost output from its biggest gas area and increase earnings.

Reliance has declined 4.7 percent this year in Mumbai compared with a 4.5 percent drop in the benchmark Sensitive Index. The shares fell 3 percent to 1,009.35 rupees at the close in Mumbai. Reliance, with a market value of about $74 billion, has the highest weighting in the benchmark index.

Singapore Margins

Margins of complex refiners in Singapore processing Dubai crude rose to a record of $7.47 a barrel on March 4, the highest level since Dec. 2. They fell to $3.60 a barrel on April 20, the lowest since March 9, according to data compiled by Bloomberg.

Crude oil in New York trading has gained 23 percent this year. The June contract was at $112.70 at 10:06 a.m. in London. It rose as much as 78 cents to $113.07 a barrel, the highest intraday price since April 11, when futures reached $113.46, the most since September 2008. Reliance’s pretax profit from refining rose 26 percent to 25.1 billion rupees in the quarter, according to the earnings statement. The company’s two adjacent refineries in the western state of Gujarat earned $9.20 on every barrel of crude oil turned into fuels compared with $7.50 barrel a year earlier.

Diesel Cracks

“We probably are going to see refining margins in Asia moderate from the highs of the first quarter as diesel cracks begin to ease in the region,” said Vivek Mathur, a Boston-based oil market analyst at Energy Security Analysis Inc. “Japan’s refineries are also coming back up after the earthquake and we see a fuel surplus.” Refiners in Japan, including Cosmo Oil Co., are ramping up production after the nation’s biggest earthquake idled about 29 percent of processing capacity.

Lower than estimated gas production is also weighing down on Reliance’s profit growth. Pretax profit from selling crude oil and gas declined 8 percent to 15.7 billion rupees in the quarter, Reliance said in an e-mailed statement.

The White House has joined congressional Democrats in targeting oil companies with criticism for nearly $4 per gallon gas.

President Obama lashed out at oil companies — and the tax breaks they get from the government — for a second consecutive day on Thursday and again in Saturday's address.

“Four billion dollars of your money are going to these companies at a time when they’re making record profits and you’re paying near record prices at the pump,” the president said at a Nevada town hall. “It has to stop.”

Obama also announced a Justice Department task force that will probe whether speculators and traders are to blame for the high prices. A spokesman for Speaker John Boehner (R-Ohio) on Friday criticized the effort as an attempt to deflect attention from White House and Democratic opposition to increased drilling in the United States.

Going after oil companies is smart politics for Obama, according to polls and Democratic strategists. Only 11 percent of those surveyed in a McClatchy-Marist poll this week said Obama and Democrats are to blame for high gas prices. Thirty-six percent of U.S. residents blamed turmoil in the Middle East for the high prices, while 34 percent say U.S. oil companies are to blame.

Seven percent said congressional Republicans were at fault.

High prices are being triggered in part by the perception that turmoil in the Middle East and higher demand in the summer driving season should drive up prices, according to Sander Cohan, a fuels analyst at Energy Security Analysis. Petroleum supplies in the U.S. are actually at seasonal levels, he said.

While the war in Libya is pulling a couple million barrels per day from markets, Cohan emphasized that perceptions of higher demand are having an even bigger effect on price. Members of Congress are hearing complaints from their constituents, which has led to tensions between the White House and Democrats in the House and Senate.

Obama has come under pressure from members of his party to do more to reduce gas prices. Sen. Charles Schumer (D-N.Y.) has called on the president to release fuel from the strategic oil reserve, which he said would provide relief to drivers at the pump and prevent the economy from slipping back into a decline.

The administration has been cool to opening the reserve, though officials have described it as an idea under consideration.

Consumers are resigned to gas price spikes, but the impact still affects their lives, said Ken Santarelli, manager of the Santarelli family's stations in Peckille and Mayfield. "People are not complaining that you are ripping them off," said Mr. Santarelli. "People are complaining that, 'I can't pay for food, medicine and gas.' " Prices will increase about 3 cents today at the Peckville and Mayfield stations, he said. The stations charged $3.85 on Wednesday.

Some gas-price related behavioral change impacts the County of Lackawanna Transit System. COLTS has seen an increase in bus ridership since February, executive director Bob Fiume said. "Once gas hits $4, I think we'll really start to see the difference," he said. The agency budgeted for potential fuel increases, Mr. Fiume said, so no temporary fare increase is anticipated to offset rising fuel bills. Higher gas costs, though, have an impact on Meals on Wheels of Northeastern Pennsylvania, which relies on volunteers to deliver food to homebound seniors.

Meanwhile, the high gas prices led taxi business owner Robbie Burgit to buy a fleet of new fuel-efficient vehicles. Mr. Burgit, owner of Burgit City Taxi in Wilkes-Barre, purchased four new white Kia cars, and he will get six more the first week of May and three more in the fall. The four-cylinder Kias get better gas mileage than his 12 older vehicles. He is replacing his older vehicles - including 2003 to 2005 Chevrolet Impalas and Venture vans - with the new Kias. Many factors contribute to rising prices, said Andrew Reed, an oil markets expert at Energy Security Analysis near Boston.

"The uncertainty in the broader Middle East region is really bumping up crude oil prices," he said, in reference to popular uprisings and regime changes. "We've got a prolonged disruption of Libyan exports."

Other factors include the lingering weakness of the dollar against other currencies, rising international demand for oil and the soaring futures price of gold, which topped $1,500 an ounce this week for the first time.

Libya is a key source of oil for Europe, Mr. Reed said, and skyrocketing fuel prices in Europe ripple throughout international markets. Gas prices may peak this month, Mr. Reed said, but will remain high because of continued turmoil in the oil-producing Middle East.

"I would tentatively say that prices will soften a bit later in the driving season, once we pass the Fourth of July," he said. "But prices won't soften by much."

Gas prices nearing the point where Americans cut back Gas prices hit a national average of $3.83 a gallon on Monday, according to AAA. Six states now have prices above $4 a gallon.

With about six weeks to go until the summer driving season begins, the price of a gallon of gasoline is just 18 cents away from the record price of $4.11, which was set in the summer of 2008. The prices at the pump hit a national average of $3.83 a gallon on Monday, according to AAA. That’s close to the point where consumers say they will have to start cut back to pay their fuel expenses. This could adversely affect restaurants, malls, and entertainment venues that count on people driving to get there. Some analysts say it’s one reason the stock market has been struggling recently, including on Monday, when the Dow Jones Industrial Average fell 140.24 points to close at 12,201.59.

“I am sure the rising cost of energy is bothering the market,” says Fred Dickson, chief investment strategist at D.A. Davidson & Co. in Lake Oswego, Ore. “I do think the uptick in gasoline prices will have an impact on consumer spending in the next few quarters.” Perhaps, because gas prices have been rising for months, most Americans are not surprised. In a survey last month, the Gallup Organization found the average American expected the price of gasoline to peak this summer at $4.36 a gallon. Some 20 percent of respondents thought the price could go as high as $5 a gallon.

Nearly every spring, the price starts to climb as refiners shift over to their summer blends, which are more expensive to produce. On top of that, this spring has seen disruptions in the oil market because of the turmoil in Libya. On Monday on the New York Mercantile Exchange, the price of oil fell $2.31 a barrel to $107.35, in part reflecting a move by China to try to slow its soaring economy.

According to Gallup's chief economist, Dennis Jacobe, the “psychological point” where people start to change their driving habits is $4 a gallon for gasoline – up from $3.50 a gallon in the past. “At $4 a gallon, you get people who might have money to spend otherwise, but with the amount gasoline costs, they start to cut back in response to the price,” Mr. Jacobe says. “At $4 a gallon, they park the extra vehicle if they have two cars and use the most efficient one, and they make fewer trips. It really does have a subtle effect.”

According to AAA, six states now have gasoline prices above $4 a gallon. The highest price is in Hawaii, where fuel is $4.48 a gallon. That’s followed by California, where the price now averages $4.20 a gallon. In addition, three other states have prices averaging between $3.90 and $4.

Almost every year since 2000, the price of gasoline has risen an average of 52 cents a gallon between January and the summer peak, according to Jeff Lenard, a spokesman for the National Association of Convenience Stores in Alexandria, Va. The lowest rise was 20 cents a gallon in 2003, and the biggest was $1.13 a gallon in 2008. So far this year, the price is up 70 cents a gallon.

The rising prices are coming at a time when gasoline inventories have been falling, says Sander Cohan, a principal at Energy Security Analysis Inc. in Wakefield, Mass. Gas inventories are now running at 23 days of available supplies, compared with 28 this winter. Last year at this time, they were at 24 days, which was also considered below normal.

Some of the low inventories are the result of refineries, especially on the East Coast, which have been taken off line for annual maintenance, Mr. Cohan says. But that maintenance should be ending soon: Cohan expects the high gasoline prices will entice refiners to crank up production shortly. After Memorial Day, the price of gasoline could collapse, Cohan worries. “There is a potential for a bubble,” he says. “If summer demand does not materialize, the gasoline price will collapse pretty quickly.”

Gasoline rose the most in three weeks after a report that U.S. inventories declined the most on a per-barrel basis since October 1998 as refinery rates and imports of the motor fuel dropped while demand improved.

Futures gained 2.5 percent after the Energy Department reported gasoline stockpiles sank 7 million barrels, or 3.2 percent, to 209.7 million barrels, the lowest level since November. Supplies fell as gasoline imports slipped 17 percent and refiners cut rates 3 percentage points to 81.4 percent, a six-week low. Demand jumped to a 5-week high.

“It’s an immediately bullish report because it tightens supplies,” said Sander Cohan, an analyst with Energy Security Analysis Inc. in Wakefield, Massachusetts. “But this points to something bearish in the next couple of weeks because the reason for the big decline is refiners are staying out of the market for economic or maintenance reasons.”

Gasoline for May delivery rose 7.83 cents to settle at $3.2424 a gallon on the New York Mercantile Exchange. It was the first gain in three days and largest since March 17. The fuel traded at a 3.96 cent premium to heating oil, its strongest performance since July 30. Inventories were forecast to decline 1 million barrels in the week ended April 8, according to a survey by Bloomberg News. Supplies have shed 31.4 million barrels, or 13 percent, since Feb. 11, when they were the highest in almost 21 years.

Oil fell, capping the biggest two- day drop in almost 11 months, after the International Energy Agency and International Monetary Fund said that prices above $100 a barrel are starting to hurt the global economy and Goldman Sachs Group Inc. forecast a “substantial” correction.

Oil plunged 3.3 percent after the IEA reported signs of an oil-demand “slowdown” in its monthly Oil Market Report today. The IMF cut its growth forecasts yesterday for the U.S. and Japan, two of the top three oil-consuming countries. Brent oil may drop more than $15 to $105 a barrel, Goldman said in a note to clients today.

“Right now, we’re in free-fall range,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. “We have a market condition that was way overbought, so now its length is getting stomped out of the market. There could be a ways to go in this selloff.” Crude oil for May delivery fell $3.67 to $106.25 a barrel on the New York Mercantile Exchange, the lowest settlement since March 30. Prices have tumbled 5.8 percent since April 8, the biggest two-day retreat since May 14 and 17, 2010. Futures have risen 26 percent in the past year. Prices declined from the settlement after the American Petroleum Institute reported at 4:30 p.m. that U.S. crude-oil stockpiles rose 1.19 million barrels to 355.5 million. May oil was down $3.90, or 3.6 percent, to $106.02 a barrel in electronic trading at 4:33 p.m.

Confirming Suspicions

“Yesterday’s IMF statement that the U.S. and Japan economies are being hurt by higher energy prices confirmed everybody’s suspicions,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. “We’ll move back to the $104-$105 level where we’ve got some technical support.”

Brent oil for May settlement fell $3.06, or 2.5 percent, to end the session at $120.92 a barrel on the London-based ICE Futures Europe exchange.

Crude rose above $110 a barrel for the first time in 30 months as a fire burned at Libya’s Sarir oilfield, bolstering concern that unrest in North Africa and the Middle East will spread, curbing shipments.

Futures climbed 1.4 percent after NATO said forces loyal to Muammar Qaddafi caused a fire at the field, according to Al Arabiya television. The conflict in Libya is currently in a stalemate, said Army General Carter Ham, the U.S. commander for Africa. Revolts have led to the overthrow of governments in Egypt and Tunisia and targeted regimes from Syria to Bahrain. “The situation in Libya, and issues elsewhere in the Middle East, offer a chance to buy the rumor,” said Sarah Emerson, managing director of Energy Security Analysis Inc. in Wakefield, Massachusetts. “There’s a tremendous upward momentum and I see nothing in the near-term to stop the rally.”

Crude oil for May delivery rose $1.47 to $110.30 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 22, 2008. Futures are up 28 percent from a year ago.

Brent oil for May settlement increased 37 cents, or 0.3 percent, to end the session at $122.67 a barrel on the London- based ICE Futures Europe exchange. It was the highest settlement price since Aug. 1, 2008.

Malaysia's move to drop its crude price benchmark, once a symbol of national pride as the marker for a large chunk of Asia-Pacific oil output, may prompt a similar transition by other regional producers.

Trade sources said state-owned Petronas [PETR.UL] will switch to European bellwether dated Brent after falling output and the resultant volatility made the previous benchmark, in place for more than a decade, unreliable.

It will switch to 100 percent dated Brent assessment from oil pricing agency Platts from June 1, they said. The switch could speed up similar changes for Indonesia and Vietnam, unifying a fragmented pricing structure in Asia, user of a third of global crude, and extending Brent's influence as a cross-continent price marker. It will also enable Malaysian crudes such as flagship Tapis to compete head on with similar grades priced on Brent.

"Certainly, there have been questions about the APPI price discovery process," said Rick Mueller, global crude analyst at Energy Security Analysis, Inc. "Since Brent is a more widely traded and trusted crude benchmark, it would eliminate some of the uncertainty surrounding Tapis."

Malaysia's move to abandon the Asia Petroleum Price Index (APPI), after years of resisting the change, highlights the southeast Asian nation's concerns of losing out to growing imports of rival Western grades into Asia. A similar announcement is expected from Brunei soon, trade sources said.

Saudi Arabia's plans to expand its drilling rig count by 28 percent signal a rush to deliver the 12.5 million barrels a day (bpd) of capacity that Riyadh has long claimed is in place.

Two Saudi officials told Reuters on Tuesday that the extra rig activity would maintain rather than increase the kingdom's oil capacity. It completed a multi-year expansion in 2009 meant to boost spare capacity by more than 3 million barrels per day.

"It's not to expand capacity. It's to sustain current capacity on new fields and old fields that have been bottled up," one of the officials said.

State-run oil giant Saudi Aramco met leading oil service companies including Halliburton over the weekend to discuss plans to boost the country's rig count this year and next to 118, from around 92 now, Simmons & Co analyst Bill Herbert said on Monday.

Saudi Arabia increased its output to around 9 million bpd this month to help compensate for disruption of supply from fellow OPEC producer Libya.

Higher oil prices set off by recent political unrest in the Middle East and surging demand for crude in the developing world are spurring increased activity in the Saudi oil patch.

Brent crude traded above $115 a barrel on Tuesday and has risen 22 percent this year. In theory, Saudi Arabia possesses a 3.5-million-bpd cushion to protect against any further supply outages on the global market. But many in the oil industry question how quickly and sustainably Riyadh could deliver that volume. Simmons & Co founder Matthew R. Simmons, until his death in August 2010, repeatedly questioned Saudi Arabia's ability to boost and sustain higher production in the long term, citing geological constraints.

Other commentators have also doubted the extent of Saudi spare capacity and said it would be tested to the limit if protest movements across the Middle East caused further supply disruption. Already violence in Libya has cut exports of about 1.2 million bpd on the 89 million bpd world market.

OIL'S CENTRAL BANKER

Much of Saudi Arabia's international influence has derived from a role often described as the oil world's equivalent of central banking.As the holder of almost all the available spare production capacity, it can add supplies to oil markets in time of need. The only other significant spare capacity, albeit in much smaller volumes, is controlled by Saudi Arabia's fellow Gulf states the United Arab Emirates and Kuwait.

Maintaining surplus capacity costs billions and some analysts have questioned whether Saudi Arabia would continue to invest, especially when the world's largest oil consumer the United States has repeatedly said it wants to wean itself off foreign oil. Since then, Riyadh has said there was no need to increase its oil capacity and has shifted the focus to expanding its natural gas production, needed for domestic power needs.

"Plenty of people out there paint a doomsday scenario of Saudi capacity, but I don't buy that," said Sarah Emerson of Energy Security Analysis Inc in Boston.

"This doesn't sound like a scramble to me. They need to add more equipment as they go along and retrofit older equipment."

Brazilian state oil company Petrobras will boost its oil price forecast to more than $80 a barrel for its next five-year plan, a company director said on Monday, one of the clearest signs yet that energy companies are convinced high prices are here to stay.

The increase would put Petrobras (PETR4.SA) price expectations above the $70-$80 band that Saudi Arabia and other OPEC countries have informally targeted since 2008. Many analysts expect prices to remain above $100 amid war in Libya and Middle East unrest. Petrobras itself had recently said the price jump above $100 was temporary.

The new price estimate would be part of the company's 2011-2015 business plan expected to be released in May to replace the current $224 billion 2010-2014 plan. Increasing corporate faith in higher prices could encourage companies to invest in drilling more wells sooner rather than later. This could help avoid a repeat of the price spike in 2008, which followed a prolonged period of underinvestment as executives feared a short-lived rally.

After a relatively calm market through 2010, prices have surged to more than $100 a barrel this year, forcing companies to reexamine their long-range assumptions in the event that prices retain a geopolitical risk premium.

REASSESSING PRICES

"Companies like Petrobras are absolutely revisiting their long-term price forecasts simply because of events in the Middle East," said Sarah Emerson, President of Energy Security Analysis, Inc in Boston. "And combined with other factors, they determine there's more upside price risk than downside risk." Most oil companies do not divulge their own estimates for future oil prices.

Petrobras' access to huge reserves that are relatively expensive to produce make its expectations of oil prices crucial for traders to understand market sentiment. Higher crude prices would be welcome news for Petrobras, which has borrowed heavily to finance an ambitious plan to nearly double crude output in Brazil to almost 4 million barrels per day by 2020.

Diesel-fuel prices are getting turbocharged as Japan picks up the pieces following its devastating earthquake, tsunami and nuclear-plant crisis.

The 9.0-magnitude quake that struck northeast Japan on March 11 caused enormous damage, including to several oil refineries. The damage assessment is still under way, but the oil market expects Japan's rebuilding to be diesel-fueled.

In regional markets around the world, prices are rising for diesel, which is used in generators, transportation and manufacturing, which all will play key roles in rebuilding Japan. Japanese refineries, once major diesel exporters, are struggling to supply the domestic market.

As Japan's post-quake energy needs become clearer, it will add an extra layer of volatility to fuel prices already being batted around by unrest in the Middle East and North Africa. Prices for oil, as well as for diesel and similar fuels known as distillates, are at their highest levels since the summer of 2008.

Japan probably will export 50,000 fewer barrels of diesel each day this year because of the earthquake, with that fuel being missed most in Europe and South America, writes Energy Security Analysis, a consultancy.

Global diesel supplies were already expected to be tight in 2011, because of a stronger world economy. Higher prices are raising refiners' profits. That, in turn, could lift oil prices if refiners start using more crude to take advantage of the better margins.

In Los Angeles, where refiners export to Japan, ultra-low-sulfur diesel traded Thursday at 17.5 cents above benchmark heating-oil futures, versus 11 to 13 cents before the earthquake. In Europe and Asia, the diesel "crack" -- an approximation of refiner profits -- jumped nearly 20% after the earthquake to its best level in at least a year. In the States, according to the U.S. Energy Information Administration, the average national retail price of a gallon on ultra-low-sulfur diesel fuel was about $3.91, as of March 21, versus $3.33 at the start of the year.

The Japan quake's impact on the oil market will depend on whether increased demand from construction will outpace lower consumption from the nation's weakened economy. Radiation is still leaking from damaged nuclear reactors, and contamination fears could hurt Japanese exports, reducing economic activity -- and oil demand -- more than expected. And that is likely to keep applying upward pressure on diesel prices.

When Japan starts to rebuild, it will be looking to replace the nuclear-generating capacity it lost to the earthquake and tsunami – and natural gas is likely to be one of the solutions.

Already a significant importer of natural gas, Japan could rely more heavily on the fuel to run generators, which could then supply Japanese industries with electric power. Post-disaster electricity shortages have prompted many large Japanese companies to curtail production, possibly leading to a worldwide shortages of some electronics and auto parts.

If Japan does opt to import more natural gas, the shift might result in modestly higher natural-gas prices on the world markets next year, energy analysts say. But Americans who use natural gas would be spared a price shock, they predict, because the US is largely self-sufficient in natural-gas production.

“The US natural-gas market is an isolated market,” says Vivek Mathur of Energy Security Analysis Inc. (ESAI) in Wakefield, Mass. “It is different in terms of the world supply and demand fundamentals.”

This stands in contrast to July 2007, when an earthquake registering magnitude 6.8 rocked Japan and knocked out the Kashiwazaki-Kariwa Nuclear Power Plant. Prices of LNG on the spot market (purchases made without a long-term contract) soared to $20 per million BTUs. By way of comparison, prices are currently about $10 per million BTUs.

The impact on the US was also much greater then, says Ms. Barden, because the US was importing larger amounts of LNG. According to EIA data, the US received about 99 billion cubic feet of LNG in July 2007. As of December, US imports were down to 29 billion cubic feet for the month.

At the moment, US imports of LNG are modest because domestic natural-gas production is abundant from shale formations in places like Texas and Pennsylvania. This abundance helped to keep home heating prices down this past winter for households that use gas.

To make up for its lost nuclear power, Japan will import 10 percent more LNG than it did last year and an additional 130,000 barrels of oil per day, estimates Mr. Mathur, the energy analyst.

Japan’s increased demand for natural gas comes when there is enough spare capacity to fill the need, says Mathur. “Some could come from the United Kingdom and Belgium and other parts of the Mediterranean. Indonesia could supply some cargoes, and South Korea has agreed to supply gas if it’s an emergency,” he says. In addition, Mathur says, there is spare capacity in the Middle East that could be diverted from Europe.
If the price of natural gas were high enough, some buyers of LNG in the US might be willing to forgo their cargoes.