Oil Prices Cool Off After U.S. Softens Stance on Iran
By Barbara Hagenbaugh
WASHINGTON — Oil prices fell for the first time in a week Wednesday as gasoline prices continued to decline.
Oil prices fell 74 cents, or 1%, to $71.29 a barrel in trading in New York after the Bush administration said it would participate in talks with Iran about its nuclear ambitions if the country halts its effort to produce nuclear fuel.
Worries about a potential showdown between Iran and other nations about Iran’s nuclear program have bolstered oil prices for weeks. Although the USA does not import oil from Iran, OPEC’s second-largest producer, there is concern that should sanctions be imposed on that country, there would be less oil on the world market.
The decline in oil prices following the White House’s announcement reinforces the idea that the lofty prices, which recently hit a record high, are not supported by basic supply and demand fundamentals, says Rakesh Shankar, senior economist at Moody’s Economy.com.
“We see at least $5 to $6 in pure speculative premium,” Shankar says. “It’s a house of cards that any breath of wind will tumble.”
Although the decline Wednesday was the first in a week, prices earlier in the session were down by as much as $2 a barrel.
The fact that investors erased some of those losses suggests they question if Iran will follow through, Alaron Trading analyst Phil Flynn says.
“People are skeptical that these talks are actually going to happen,” Flynn says.
He predicts oil prices will continue to rise to a new record of $78 a barrel by midsummer, based on strong global demand and on concerns during hurricane season about the potential impact on U.S. energy supplies.
“Oil prices are going to stay strong and go up,” Flynn says.
Oil is a key element in a number of industries and accounts for half of the cost of gasoline at the pump.
The U.S. average price for a gallon of gasoline fell for the second-consecutive week this week, the Energy Department said Wednesday.
The nationwide average price was $2.87 Monday, down 3 cents from a week ago, but still up 77 cents from a year ago. Prices recently peaked at $2.95 a gallon May 15, according to the government’s weekly report.
Prices remained above $3 a gallon in several cities, such as Los Angeles, New York, San Francisco and Seattle, this week.
Large drops in prices at the pump are unlikely, says Fred Rozell, retail pricing director at Oil Price Information Service, which tracks gasoline prices. That’s because the memory of the reduction in gasoline supplies and the quick run-up in prices to record levels following last year’s hurricanes is too fresh. Weather forecasters have predicted another active hurricane season, which begins today.
“There’s still that fear,” Rozell says. “Any time the wind picks up and threatens to blow anywhere near the refining sector, prices are going to go nuts.”
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