Oil sets record near $128; pump price at high, too

[May 17, 2008]  NEW YORK (AP) -- News that Saudi Arabia had boosted its oil output by 300,000 barrels a day was greeted as a non-event on oil markets - the move wasn't anywhere near the kind of production increase needed to bring prices down on Friday.

And traders were equally unimpressed by the U.S. government's plan to stop adding to the Strategic Petroleum Reserve.

One day, two moves designed to allay concerns about an overheated oil market that's squeezing motorists and inflating the prices of all sorts of goods.

The response in the oil trading pits? Traders did what they've been doing for months now, and pushed crude oil and gasoline futures to new highs.

"All in all, we're seeing another strong move here on little fundamental news," said Jim Ritterbusch, president of Ritterbusch & Associates, an oil trading advisory firm in Galena, Ill.

The reason for the disconnect has little to do with political decisions in Washington or Riyadh, and everything to do with market expectations. The Saudi production increase was seen in the market as minuscule, and no one expected the suspension of shipments to the U.S. government's Strategic Petroleum Reserve to have much impact on supplies.

Even more important, the traders placing the bets expect prices to just keep moving higher.

Goldman Sachs, one of the world's most influential investment banks, underscored that sentiment Friday when it hiked its oil price forecast for the second half of the year to $141 a barrel, up from $107 previously. Analysts at the bank argue that the oil market is undergoing a "structural repricing" that will continue to play out for some time to come.

"We would view any pullback in oil, regardless of the size or duration - although a correction could be as large as 15 percent - as an opportunity to re-establish long positions in oil before the summer," Goldman Sachs advised traders.

Translation: Buy when barrels go on sale, because prices are bound to keep heading higher.

And buy they did Friday. The price for a barrel of benchmark light, sweet crude for June delivery jumped $2.17 to settle at record close of $126.29 on the New York Mercantile Exchange. Earlier in the session, prices surged to $127.82 a barrel, also a new high.

It was the eighth time in the past 10 sessions traders rewrote the record books, and the first time prices topped $127 a barrel.

Investors shrugged off the news from Saudi Oil Minister Ali al-Naimi that the world's largest oil producer had decided to increase production last week. The market also had little reaction to the Energy Department's announcement said it would cancel shipments into the Strategic Petroleum Reserve for six months beginning July 1.

"It's ridiculous because I don't think this is going to bring the price down," said Phil Flynn, an analyst at Alaron Trading Corp., of the Energy Department's move.

The effect of Saudi Arabia's decision was also not clear. The increase, which went into effect last Saturday, is relatively small, lifting total output from the world's leading producer to 9.45 million barrels per day by June.

The addition of "300,000 barrels won't make a lot of difference," said Mir Yousufuddin, who monitors crude prices for the U.S. Energy Information Administration.

The announcement came during a visit by Bush, who was in the kingdom to appeal for a more significant increase in production. Bernard Picchi, an energy analyst at research firm Wall Street Access, called the increase "a token amount" and said the effect on prices would have been different if Saudi Arabia had boosted production by 1 million or 1.5 million barrels a day.

Saudi Arabia often adjusts its output to meet demand, and the increase coincides with the start of the peak driving season in the U.S. The Middle Eastern nation has in the past acknowledged the ability to produce as much as 11 million barrels a day.

James Cordier, president of Liberty Trading Group in Tampa, Fla., agreed that the moves by both the U.S. and Saudi Arabia were "insignificant" and would do little to dent the rally in oil prices. Like a number of other analysts, he believes prices are rising not because of a speculative bubble, but simply reflect finite supply and soaring global demand.

Crude's latest surge comes a week before the Memorial Day holiday, the traditional start of the summer driving season, suggesting that retail gas prices still have further to rise. Motorists are now paying a national average of $3.787 a gallon for regular gasoline, up nearly a penny from the previous day, according to AAA and the Oil Price Information Service.

Diesel prices also have risen to record levels, meaning that even Americans who don't drive will likely face even higher prices on all sorts of goods because of increased shipping costs. A gallon of diesel now sells for $4.482 a gallon.

Oil prices could rise even higher as U.S. demand picks up during the summer months, when gasoline consumption is typically the heaviest. Traders are clearly betting gasoline prices have a way to go too: Gasoline futures jumped to a record $3.2438 a gallon on the Nymex before easing slightly to settle at $3.2235, up 5.777 cents.

In other Nymex trading, heating oil futures rose 8.04 cents to settle at $3.7028 a gallon. Natural gas futures fell 30.5 cents to settle at $11.094 per 1,000 cubic feet.

In London, July Brent crude surged $2.36 to settle at $124.99 a barrel on the ICE Futures exchange.

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Associated Press Writers H. Josef Hebert in Washington and Jennifer Loven in Riyadh, Saudi Arabia, contributed to this report.

[Associated Press; By ADAM SCHRECK]

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