Oct. 22, 2004, 10:40PM

Oil futures reach high; Dow dives

Crude prices top $55, and with other key fuels surging, fears abound about economy's health

By LYNN J. COOK
Copyright 2004 Houston Chronicle

Simmering crude oil prices boiled over Friday, closing above the $55 mark for the first time

Futures for West Texas Intermediate crude oil — the market's benchmark — closed at $55.17 after trading as high as $55.50 on the New York Mercantile Exchange.

Oil's ascent has depressed the stock market where investors fear high oil prices will stall the economy.

The high price of crude, coupled with weaker than expected earnings for Microsoft and Coca-Cola, sent stocks into a downward spiral. The Dow Jones Industrial Average fell nearly 108 points in late trading to settle at a year-low 9,758.

It was only a few weeks ago that the media and other market watchers were speculating about whether crude oil could actually hit $50 per barrel. Today, the big question looming is whether it will hit $60 — or higher.

"A lot of technicians have thrown around $60. I've even seen some pie-eyed estimates of it going to $80," said Ted Harper, an energy analyst for Frost Bank. "It's hard to tell, but the path of least resistance is to the upside."

In the past week there has also been a runup in the prices of other key fuels traded on the futures markets, with a 21 percent percent rise in natural gas and a 2 percent jump in gasoline. The average pump price in the Houston area is near the record set this spring.

This rally has been fueled by fears of short supplies, which were fanned Friday by news of continued surging growth in China's economy despite persistently high prices and the government's attempts to cool off the economy.

China now buys more outside oil than any other country in Asia thanks to an industrial revolution powered by oil that's created jobs and discretionary income for many residents. The country's crude imports jumped 44 percent in 2003 and have kept climbing this year.

Chinese GDP up 9.5 percent

According to Friday's report, China's gross domestic product for the first three quarters of the year is up 9.5 percent compared to last year.

China's consumer confidence index is up 3 percent since June.

By comparison, U.S. consumer confidence has dropped 5 percent since June.

Many marketwatchers point to the fundamental supply-demand equation as justification for today's high prices.

OPEC countries are pumping almost all the oil they can and global demand has winnowed spare oil production capacity to less than 1 million barrels per day. Problems persist from Hurricane Ivan's sweep through the Gulf of Mexico. More than 400,000 barrels of daily oil production remains shut in. Making the situation worse, oil from the Gulf is mostly the light, sweet kind of crude that's easy to refine and in high demand.

Natural gas surged Friday for some of the same reasons. Continued fallout from Hurricane Ivan is keeping 1.5 billion cubic feet of natural gas from the market as the country braces for a cold winter.

The price of natural gas at the Henry Hub, a Louisiana distribution point, hit $8.105 Friday, a 20-month high. Rising natural gas prices are not a temporary blip. Futures for December through March are all trading at $9 per million British thermal units — or higher.

To understand how expensive that is, consider the rule of thumb typically used to corollate oil and natural gas prices: Henry Hub natural gas usually costs $1 per million Btu for every $10 in the spot price of a barrel of West Texas Intermediate. At current crude prices that would put natural gas costs at about $5.50 in theory. In reality natural gas is trading 50 percent higher than that.

Effect of supply, demand

Ajey Chandra, an analyst in the Houston office of energy consultancy Purvin & Gertz, said natural gas is a regional commodity caught in the squeeze between rising demand and falling supplies.

Recently, the United States has piped in about 15 percent of its natural gas needs from Canada. But in 2003 Canadian imports dropped by 7.8 percent. It was the first drop in natural gas imports in 16 years.

"We could always count on Canada for supply," Chandra said. "But now they're consuming more themselves. And their basins are maturing, too."

Some analysts speculate that oil traders want to push prices to an all-time high — in essence driving the crude market steadily skyward until demand for the fuel slacks off.

That idea was echoed by a bulletin put out by the Organization of the Petroleum Exporting Countries this week.

The group criticized the oil market's reaction to remarks by Federal Reserve Bank Chairman Alan Greenspan.

Last week in a speech to the National Italian American Foundation, Greenspan said high oil prices have been spurred by above-ground politics and hesitation on the part of oil companies to invest in drilling more wells.

He estimates the roiling oil market has shaved three-fourths of a point off U.S. gross domestic product.

ljcook@chron.com