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August 23, 2000

Oil Futures Rally on Stock Drop
By Myra P. Saefong,

High Oil Prices Are Huge Factor in Inflation ... Weiss comments

NEW YORK - October crude jumped above $32 a barrel Wednesday after two key reports confirmed a bigger-than-expected decline in U.S. crude inventories, compounding fears of inadequate supplies.

On the New York Mercantile Exchange, October crude added $1.13 to $32.35 a barrel. September heating oil climbed 3.8 cents to 94.15 cents per gallon, and September unleaded gasoline added 1.42 cents to 94.75 cents per gallon. September natural gas rose 15.5 cents to $4.675 per million British thermal units.

"Supply is stagnating at record lows, with volatile up-and-down movements in the past two weeks canceling out," Allan Brady, an economist at the Dismal Scientist, said in a weekly report.

After the markets closed Tuesday, the American Petroleum Institute said crude stocks, as of the week ended August 18, fell 7.8 million barrels. Total inventories of 279.7 million barrels are at their lowest level in nearly 24 years.

API's measure of distillate supplies, which include heating oil and diesel fuel, unexpectedly declined by 2.9 million barrels, despite expectations for a rise of 2.5 million to 2.9 million barrels.

"The decline in distillate stocks, uncharacteristic for this time of year, will lend further upward pressure to petroleum prices especially because of their already low level," Brady said.

Gasoline inventories fell 1.14 million barrels, the API said, on the high end of expectations for a drop of 800,000 barrels to 1.2 million barrels. Energy Department stocks fell 1.2 million barrels.

Meanwhile, refinery production rose to 96.9% of capacity from the prior week's revised 95.7% of, the API reported.

Enter the hurricane season

Crude prices were also supported by concerns over potential interruptions in oil and natural gas production in the Caribbean and Gulf of Mexico.

"The arrival of hurricane season is adding more uncertainty to oil prices," Brady said. "While Hurricane Debby, currently heading toward Florida, has not affected Gulf Coast or other production, damage in previous years has restricted work in this vital source of U.S. gasoline supply."

"Low stock levels, causing short-term inelasticity in supply, result in wild price volatility in reaction to market shocks," Brady explained. A hurricane hitting the Gulf area with "any severity" would result in just such a price spike in addition to the current high price level, he added.

Alan Greenspan may not have elected to raise interest rates yesterday, but as oil prices continue to rise in the coming months, the Fed will be hard-pressed not to act. Oil prices have been mounting for some time and the upward pressure at the pump is only going to get worse.

Oil supplies are at record lows even though production is near full capacity. This means that there is not much chance of building up inventory, and any event, such as a hurricane slamming into America's Gulf Coast, will undoubtedly drive oil prices skyward.

In turn, this will force all of the industries that rely on oil, such as airlines and trucking, to raise the prices of their products and services. Oil prices do not just affect transportation, either. Manufacturers of paper and other household goods are severely affected by rising fuel prices. These are just the industries on the frontline; it doesn't take long for a hike in oil prices to permeate every part of American business.

Higher oil prices can single-handedly spark inflation. And, with all of the other factors in place -- tight labor market, low savings rate -- spiraling fuel costs could ignite an economic meltdown.

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