Oil ends slump, rises above $83 on final trading day; experts say rally should cool this year

By Chris Kahn, AP
Tuesday, April 20, 2010

Oil prices follow stock market higher

NEW YORK — Oil prices rose more than 2 percent Tuesday, rebounding from a two-week slump as stock markets rallied and the dollar fell.

The turnaround comes amid last-minute deal making on the final day of the May contract. Experts said oil prices probably won’t move much higher in the next few months, making a summertime spike in gasoline and other fuels less likely.

Benchmark crude for May delivery added $2 to settle at $83.45 a barrel Tuesday on the New York Mercantile Exchange. Most of the trading had already shifted to the June contract, which increased 72 cents to settle at $83.85 a barrel.

Oil prices have cooled off over the last two weeks. They’ve tumbled for eight of the past nine trading days since hitting $87 a barrel earlier this month.

Analysts say the volcanic eruption in Iceland that shut down air traffic in much of Europe since last week cut demand for jet fuel. On Tuesday flights were landing in some cities, such as Barcelona, Spain, and Rome, but many European airports remained shut.

A fraud case against Goldman Sachs also has put a major player in commodities trading in the crosshairs of the federal government. If Goldman is forced to cut back on some of its positions in oil, it could effect the rest of the market, analyst Stephen Schork said.

Meanwhile, experts continue to question why anyone should pay so much for oil. Crude oil prices, which have followed stocks higher, are now 75 percent more expensive than they were last year. Investors have poured enough money into oil to set all-time records twice this month on the New York Mercantile Exchange.

Other fuels like natural gas, are only slightly more expensive than they were last year.

Schork said that investors are getting more aggressive as Wall Street rallies, and many have flocked to oil, where prices have almost tripled since their low point last year.

“God bless them, the union pension funds and college endowments that got burned when prices crashed from $150 a barrel have gotten back in it,” Schork said. “It’s the allure of an alternative investment.”

But increasingly, experts are doubtful that oil will rise at the same pace.

Bank of America Merrill Lynch said in a research note Tuesday that Americans simply aren’t consuming enough to justify higher prices and predicted that oil will struggle to rise later this year. The analysts noted that a lot of oil is simply moving to storage houses and supertankers — not to refiners who make gasoline and other fuel. They said OPEC also has boosted production recently and could push even more oil onto the world market.

Bank of America Merrill Lynch said it expects benchmark oil to slip to an average of $83 a barrel in the second quarter. It said oil should rise to an average price of $92 a barrel in the second half of the year.

Edward Meir, a senior commodity analyst at MF Global in New York, added that oil will continue to suffer as the dollar strengthens. A stronger dollar usually helps push down oil prices by making crude more expensive for investors holding other currencies.

“Commodity markets have to work against the headwind of a stronger dollar, which, given the turmoil in Europe, will only intensify,” Meir said.

At the pump, gasoline prices dipped overnight to a new national average of $2.859 a gallon, according to AAA, Wright Express and Oil Price Information Service. A gallon of regular unleaded is 3.9 cents more expensive than it was last month and 80.1 cents more expensive than a year ago.

In other Nymex trading in May contracts, heating oil rose 2.34 cents to settle at $2.1802 a gallon and gasoline gained 2.65 cents to settle at $2.2809 a gallon. Natural gas added 3.1 cents to settle at $3.975 per 1,000 cubic feet.

In London, Brent crude’s June contract added 57 cents to settle at $84.80 a barrel on the ICE futures exchange.

Associated Press writers Pablo Gorondi in Budapest and Alex Kennedy in Singapore contributed to this report.

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