Oil Poised for Drop as Price Gap to Gasoline Widens (Update1)

By Mark Shenk

Oct. 8 (Bloomberg) -- The widening gap between crude oil and the relatively low price of gasoline is signaling the first quarterly decline in oil prices in a year.

While oil has fallen in the fourth quarter during 13 of the past 20 years because of the transition from peak summer demand, the pressure for another drop in the months ahead is the most intense since 2004 and may defer any rebound to record crude prices until the first half of 2008.

Citigroup Inc., Deutsche Bank AG and HSBC Holdings Plc anticipate oil will slide from last month's record $83.90 a barrel as gasoline sales weaken to the lowest level this year and a slowing U.S. economy curbs demand. Profits from making fuels are so low that refiners have 12.5 percent of capacity off line, the second-highest rate of the past two decades for this time of year, data from the U.S. Department of Energy show.

``Refinery profit margins are being squeezed at a time when significant maintenance is scheduled,'' said Tim Evans, an energy analyst with Citigroup Global Markets Inc. in New York. ``The combination of these factors should send crude oil lower.''

Oil traders and analysts have never been more pessimistic, with 75 percent of respondents anticipating prices will fall, according to a weekly survey by Bloomberg News that started in April 2004.

Crude may end the year below $70 a barrel, compared with $81.66 at the end of the third quarter, forecasts Adam Sieminski, the global oil analyst at Deutsche Bank in New York. If he's right, a $1 million investment in crude oil futures in New York would more than double to $2.3 million, assuming speculators used the exchange's minimum deposit to conduct the transaction.

Lower Fuel Demand

``The most important development of the last six weeks has been that there's been no growth in demand for petroleum products,'' Sieminski said. ``High gasoline prices weren't enough to curb demand. The combination of the threat of layoffs and higher mortgages might finally be doing the job.''

Not everyone forecasts that oil will move lower by the end of the year. Goldman Sachs Group Inc. is the most bullish commodities trading firm on oil, forecasting on Sept. 17 that crude will end the year at $85 a barrel, with a ``high risk'' of a jump above $90, according to a report from analysts including Jeffrey Currie in London. Its two current trading recommendations on oil are both money-losers. One of them was to buy the gasoline refining margin, which has lost more than half its value since then, Goldman's research shows.

U.S. fuel consumption during the four weeks ending Sept. 28 averaged 20.45 million barrels a day, down 0.3 percent from the same period a year earlier, according to the Energy Department.

`First Time'

``We've seen with gasoline that month-on-month demand is lower for the first time in the U.S. in years,'' said Hakan Kocayusufpasaoglu, director of commodity derivatives at Credit Suisse in London.

Gasoline futures on the New York Mercantile Exchange declined 7.1 percent to $2.034 a gallon in the last five months, while crude oil has increased 31 percent to $80.41 a barrel during the same period.

``We're at a turning point for prices and margins,'' said Lynn Westfall, San Antonio-based chief economist for Tesoro Corp., the second-biggest refiner in California. ``It's hard to imagine $80 oil being sustainable based on supply.''

The profit from turning three barrels of crude oil into two barrels of gasoline and one of heating oil fell to $5.7406 on Oct. 2, the lowest in 11 months. It surged to $30.479 on May 17, the highest since at least 1989, based on futures prices in New York.

Refinery Usage

U.S. oil refineries are running at 87.5 percent of capacity, according to the U.S. Energy Department. The only time rates were lower for this time of year was in 2005, when Hurricanes Katrina and Rita slammed the Gulf Coast. Crude-oil demand is falling this month because refiners have scheduled maintenance during a lull in fuel sales.

``You're looking at a situation where refinery maintenance will cut back on demand, product demand seasonally has been falling and the threat of hurricanes'' is easing, said Harry Tchilinguirian, a senior oil market analyst for BNP Paribas in London. ``Last year there was an end-of-season correction'' after it became obvious the hurricane season was not severe.

The Atlantic hurricane season lasts from June through November. So far this year, no hurricanes have damaged U.S. Gulf Coast refineries and oil rigs.

Rising Supply

U.S. crude-oil supplies rose 1.14 million barrels to 321.8 million barrels in the week ended Sept. 28, an Energy Department report showed. The gain left stockpiles 9.3 percent higher than the five-year average for the week.

Crude-oil inventories may also rise because of increased production by the Organization of Petroleum Exporting Countries. The group, which is responsible for about 40 percent of global output, agreed last month to increase output by 500,000 barrels a day starting Nov. 1.

OPEC pumped 30.3 million barrels a day in August, or more than 33 percent of world crude supplies, according to Bloomberg data.

``The next move will be south toward the low $70s and high $60s before the end of the year, primarily as more bad news comes from the U.S. economy,'' said Pierre Martin, a Frankfurt-based manager of a $565 million commodity fund at DWS Investment GmbH, a unit of Deutsche Bank AG.

Last Updated: October 8, 2007 09:08 EDT