Fed's Greenspan Says Oil Price `Frenzy' May Moderate
By: Steve Sawyer | Source: Bloomberg
April 5, 2005 3:56PM EST

April 5 (Bloomberg) -- U.S. Federal Reserve Chairman Alan Greenspan said rising oil inventories may ``damp the current price frenzy,'' which lifted crude to a record yesterday. Prices at all-time highs have slowed oil demand growth ``only modestly'' in recent months, Greenspan said, according to the text of a speech delivered via satellite to the National Petrochemical and Refiners Association in San Antonio. Improvements in energy efficiency in cars and factories are more likely over the longer term, he said. ``Much will depend on the response of demand to price over the longer run,'' Greenspan said. ``If history is any guide, should higher prices persist, energy use will over time continue to decline, relative to GDP.'' Benchmark New York oil price have climbed 64 percent in the past year, raising concern that energy prices could spur inflation or slow global economic growth. While OPEC raised production last month, the group failed to check the oil-price rally amid concern that member states are pumping near capacity. Crude oil for May delivery dropped 97 cents, or 1.7 percent, to $56.04 a barrel today on the New York Mercantile Exchange. Prices touched a record $58.28 yesterday. Greenspan said the modest decrease in demand growth and rising production is forcing the market to ``absorb'' more oil. ``The market's response has been a shift in the spread between spot prices and near-term futures that has facilitated inventory hedging.'' Contango Oil for delivery in June and later months this year is more expensive than for May, which is the contract nearest expiration on the Nymex. When that occurs in a futures market, it is called ``contango.'' It encourages an increase in inventories, because traders can buy the near contract and sell later months, booking a profit by storing the commodity. U.S. crude oil inventories have climbed seven straight weeks, according to U.S. Energy Department data. A week ago they reached the highest since July 2002; they are 9 percent higher than a year ago. Record oil prices are raising inflation expectations in the U.S. and causing some forecasters to mark down their outlook for U.S. and European growth. The European Commission yesterday reduced its 2005 growth prediction for the second time in six months as energy costs weigh on the dozen economies that use the euro. Slowing economies mean demand for oil may also decline. Inflation is expected to rise at a 3 percent annual rate over the next two and a half years, according to yield differences on Treasury inflation-protected securities and Treasury coupons of similar maturity. The text of Greenspan's speech didn't include any discussion of the economy or monetary policy. Natural Gas Natural gas prices may rise because domestic production and imports are not increasing quickly enough, Greenspan said. U.S. gas supplies have not ``expanded sufficiently over the past few years to prevent a marked rise in prices.'' High natural-gas prices weaken U.S. industry, he said. ``The U.S. natural gas industry has been unable to noticeably expand production, or to increase imports from Canada,'' Greenspan said. Limited LNG imports into North America have reduced access to world gas markets, where prices are generally cheaper by half or more, he said. Import prices of LNG in Europe have ranged between $2 and $4 per million British thermal units while prices in Japan and Korea have generally hovered between $3 and $5, Greenspan said. Natural gas for May delivery fell 2.2 cents to $7.572 per million Btu today on the Nymex. U.S. gas prices are up 66 percent from a low last September. Gas prices averaged about $2 per million Btu throughout the 1990s. Greenspan first said almost two years ago that the U.S. needed to expand LNG import facilities to tap global markets for the fuel and make up for declining U.S. fields. The cost to bring LNG into U.S. ports is about $3 per million Btu, Greenspan said today. OPEC Supplies The Organization of Petroleum Exporting Countries, producer of 40 percent of the world's oil, is pumping near its capacity, Rafael Ramirez, energy minister from OPEC-member Venezuela, said today in Caracas. He said there is ``enough oil in the market.'' Concern about the ability of OPEC to boost supplies is lifting prices more than a lack of oil today, he said. OPEC is discussing raising production quotas by 500,000 barrels a day for a second time this year after increasing the self-imposed limits at a meeting in Iran on March 16. ``Markets for oil and natural gas have been subject to a degree of strain over the past year not experienced for a generation,'' Greenspan said. ``Increased demand and lagging additions to productive capacity have combined to absorb a significant amount of the slack in energy markets.''

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