Oil settles near $85, higher fuel costs ahead

Oil settles near $85, higher fuel costs ahead

Oil prices have been stuck in a range of about $70 to $85 a barrel for months. That may be changing and it could mean higher fuel costs before long, AP reported.

Crude pushed to an 18-month high Thursday, passing $85 a barrel at one point, driven by a growing sense of optimism that the world will need more oil as it pulls out of the Great Recession. Now worries are starting to crop up that the rally for oil could lead to nasty results if prices keep climbing and choke off the economic recovery.

Motorists already feel the rising cost of oil at the pump, where the average nationwide retail price of gasoline is at the highest level since October 2008 and is expected to top $3 per gallon this spring or summer.

Tom Kloza, chief oil analyst for Oil Price Information Service, expects motorists will pay a little more than $300 million more for gas this Easter Sunday than they did on Easter Sunday last year. That's the difference between gas at a national average of $2.05 in 2009 and about $2.84 by this Easter, according to Kloza.

Pump prices rose half a penny to a nationwide average of $2.803 per gallon on Thursday, according to AAA, Wright Express and Oil Price Information Service. Prices are up 10 cents over the past month and 75.6 cents higher than they were a year ago.

Oil prices have jumped from $69 a barrel in early February on expectations the gradual recovery in the U.S. economy will continue. Prices also tend to move up in the spring as demand improves for fuel with the warmer weather.

So far, though, consumption of gasoline, diesel fuel, heating oil and jet fuel remains sluggish and markets are well supplied. The biggest sign of strength is from manufacturers using growing amounts of crude to restart the nation's factories.

The Institute for Supply Management, a trade group of purchasing executives, said Thursday that its gauge of industrial activity rose for the eighth straight month with the fastest growth since July 2004.

That report, coupled with a rising stock market and more signs of economic growth in China, helped pushed benchmark crude for May delivery up $1.11 to settle at $84.87 a barrel on the New York Mercantile Exchange. Prices have about doubled in the past year.

Volume has been weak this week because of the Easter holiday. The market is closed Friday for Good Friday.

Adam Sieminski, chief energy economist for Deutsche Bank, said he worries that triple-digit oil prices would push the global recovery back into recession. Prices are higher than he thought they'd be this year, but he can't predict where they may end up because a lot depends on sellers and buyers.

"If you're optimistic about growth in China and pessimistic about supply, presumably you might be able to get $100 per barrel," Siemenski said.

Other traders look at the range in prices. If oil breaks through $85 and stays there, the next range could be $85 to $95 a barrel.

"With the break of the previous highs, the positive momentum is starting to be created," said Olivier Jakob of Petromatrix. "Above $85.70 there will be no solid resistance until $90 a barrel."

Phil Flynn of PFGBest said this week's jump in prices has been fueled by reports showing unemployment is staying stubbornly high and, as a result, federal policymakers will keep interest rates low.

Nearly zero percent interest rates have helped keep the dollar weak. Because crude is traded in dollars, it becomes more expensive when the dollar falls and allows investors holding other currencies like the euro to get more oil for less.

Throw in government stimulus programs in China, the U.S. and elsewhere, and oil prices are probably $10 to $15 per barrel higher than what they otherwise would be, he said.

"This oil price is supported by the biggest global economic steroid that the world has even seen," Flynn said.

In other Nymex trading in May contracts, heating oil rose 3.77 cents to settle at $2.2167 a gallon, and gasoline gained 1.65 cents to settle at $2.3237 a gallon. Natural gas added 2.17 cents to settle at $4.086 per 1,000 cubic feet.

In London, Brent crude rose $1.31 to settle at $84.01 on the ICE futures exchange.

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