Oil falls as options expire; gas prices rise

Options let investors bet oil prices will rise or fall in the future. Oil prices can fluctuate widely on days when options expire, analysts said. The effect may be exacerbated at the moment, when prices at historic levels have drawn more investors to speculate in options, said James Cordier, president of Tampa, Fla.-based trading firms Liberty Trading Group and OptionSellers.com.

Contributing to the volatility, the June crude oil contract expires next week. Oil prices sometimes trade erratically as investors square positions ahead of a contract expiration.

Meanwhile, natural gas prices tumbled Thursday after the Energy Department said natural gas inventories rose by 93 billion cubic feet last week, more than analysts had expected.

Light, sweet crude for June delivery fell $1.32 to $122.90 a barrel on the New York Mercantile Exchange after rising as high as $126.64 earlier in the session. June natural gas futures fell 26.6 cents to $11.332 per 1,000 cubic feet.

"I think it's the natural gas (prices) weighing on the market here," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.

The dollar also reversed course Thursday, gaining strength against the euro and prompting selling by investors who had earlier bought oil as a hedge against inflation. Also, a stronger dollar makes oil more expensive to investors overseas.

At the pump, meanwhile, the national average price of a gallon of regular gas rose 1.8 cents overnight to $3.776, according to a survey of stations by AAA and the Oil Price Information Service. Prices are 67 cents higher than a year ago, and many analysts think they could rise as high as $4 on a national basis in coming weeks. Consumers in many areas are already paying that much, or more.

Diesel fuel prices jumped 3.6 cents Thursday to a new national average of $4.455 a gallon. Diesel is used to fuel most trucks, trains and ships, and is a large part of the reason prices of food and consumer goods are rising so fast.

Mike Lynch, president of Strategic Energy & Economic Research Inc. in Winchester, Mass., thinks gas prices will peak around $3.85 to $3.90 a gallon on a national basis just before the Memorial Day weekend.

"I don't think we'll go much higher than that," he said.

Demand for gasoline has been sliding since January, and many analysts think American consumers' declining appetite for fuel will eventually pull prices down. However, that theory could prove wrong if oil's price reversal is temporary. Oil prices reached a trading record of $126.98 a barrel on Tuesday.

"If we don't get a break in crude oil prices ... I can't imagine that we're going to see any relief at the pump this summer," said Stephen Schork, an analyst and trader in Villanova, Pa.

In other Nymex trading Thursday, June gasoline futures fell 4.14 cents to $3.139 a gallon, and June heating oil futures fell 1.83 cents to $3.5995 a gallon.

In London, June Brent crude fell 76 cents to $121.10 a barrel on the ICE Futures exchange.