Oil prices inch higher on Gulf spill

By Chavon Sutton, staff reporter


NEW YORK (CNNMoney.com) -- Oil prices rose Monday as investors bought crude on the possibility that the Gulf of Mexico spill could halt supply and amid optimism that Greece's woes may be over for now.

What prices are doing: Crude prices for June delivery inched 4 cents higher to settle at $86.19 a barrel.

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For more commodities prices, click chart.

Prices are up nearly 3% in the past week, but they're more than 72% higher than they were this time last year.

What's moving the market: Traders say that the massive oil spill in the Gulf of Mexico could be an impetus for higher prices in the near future, if it leads to a curtailment of offshore drilling and as oil tankers are diverted during the cleanup process. A curtailment in drilling could imply lower future supply, which would push up prices.

Over the weekend, Greece got its European Union and International Monetary Fund-sponsored bailout. Last week, Greece was downgraded to junk status and its borrowing costs skyrocketed, making it impossible for it to fund its debt without the help. As a result, the loan package is about three times higher than the original bailout package announced on April 23.

Upbeat news from the auto and manufacturing industries, as well as higher consumer spending, also helped to buoy prices. Traders saw the reports as signs that the economic rebound is entrenched.

But a stronger dollar, which was up 0.8% against the euro amid continued wariness over Europe's debt crisis, kept a cap on gains. A stronger dollar makes crude, which is denominated in the greenback, more expensive for foreign investors. This tends to dampen demand and prices.

What analysts are saying: "The result of these series of events [in the Gulf] is not that oil supply will be restricted," said Tom Pawlicki of MF Global in a Monday research note.

"It's the unintended consequences that will keep oil prices supported, including a potential halt to new offshore drilling or the diverting tankers to offload cargoes to other locations," he said.

The April 20 fire on a drilling rig in the waters off the U.S. Gulf coast is turning into one of the biggest environmental disasters ever, analysts are saying -- perhaps even larger than 1989's ExxonValdez accident, which spilled nearly 11 million barrels of oil into Prince William Sound in Alaska.

Pawlicki added that the 5,000 barrels of oil spilling into the waters per day -- the latest government estimates -- is a relatively small amount. But the effort to stop the spill and clean up the existing mess could disrupt shipments of oil from fields west of the spill to refineries along the Atlantic coast.

"Pipelines don't exist to ship crude oil between the two regions. Only product [gasoline] pipelines exist," he said. Still, crude supplies were already above average, according to government data.

Gas prices: Gas prices are on the rise, according to motorist group AAA. The average price of a gallon of regular unleaded gas is $2.895, up 1.2 cents from $2.883 a day ago. Prices are 40% higher than this time last year.

Analysts say that gasoline prices will climb higher due primarily to the onset of the driving season in the U.S., the world's largest energy consumer. However, the impact of the oil slick in the Gulf remains to be seen.

"The problem is we don't know [the spill's true magnitude]. Traders are running for cover," said Rich Ilczyszyn, senior market strategist for futures broker Lind-Waldock. "If you're short the market, you're buying at any cost, and that's what's happening now."

Ilczyszyn added that a ramp up in distillate prices (heating oil and gasoline) are also fueling crude prices. Gasoline stocks are forecast to fall by 1 million barrels due to higher levels of demand and reduced imports, according to research firm Platts.

Tighter supply and increased demand could push gas prices higher, but analysts do not expect to see the record levels -- over $4 a gallon -- of July 2008, unless their is a massive disruption in the market.

Looking ahead: Investors will soak up a slew of weekly supply and economic reports this week. The unemployment rate announcement, due out on May 7, will be of particular interest and could be a market mover.

Any new developments on the Gulf oil spill will also be watched. To top of page

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