Cheaper oil ahead?

After suffering higher pump prices, consumers could be due for some relief.

By Anthony Mirhaydari Feb 2, 2012 4:19PM

A few weeks ago, I warned that pain was coming to the pump as gas prices were set to climb. Sure enough, wholesale prices have climbed 17% from their December low.

 

The catalyst was a closing of the disconnect between crude oil and gasoline. There was just no way Big Oil was going to let its downstream refinery margins stay pinched. Crude oil climbed in October and November on Wall Street speculation and a weaker dollar and has remained elevated on geopolitical concerns and Iranian saber rattling. Gasoline kept dropping during the period but has since made up for lost time.

 

Things are about to change as crude oil drops out of its recent trading range and the dollar stabilizes. With this looking to be the beginning of a new downtrend, it should take the upward pressure off gas prices.

 

 

For one, the pressure between the West and Iran has ratcheted down a notch. The International Atomic Energy Agency announced Wednesday that it had made a "good trip" to Iran to discuss Tehran's nuclear program and would return soon. The chatter is that Iranian leaders are trying to reopen talks with the West as the European Union and the United States place sanctions on Iran oil exports.

 

Although this is likely just a delay tactic, it has cooled fears of an Iranian closure of the Strait of Hormuz oil transit point in the Persian Gulf.

 

Also, the euro has come under renewed pressure as the Greek bailout situation reaches a critical new stage. Moreover, the dollar's recent weakness was driven by monetary debasement fears, with the Fed apparently ignoring its new inflation target by promising to keep interest rates lower for longer through 2014 (and teasing a third round of quantitative easing) even though consumer price inflation is running at an uncomfortable 3%.

 

Now attention turns to the European Central Bank's debasement of the euro with an upcoming auction of ultra-cheap three-year money expected to total more than €1 trillion.

 

Finally and most importantly, energy demand is dropping. It's simple supply and demand that prices should drop as well. Standard Chartered analysts are looking for "significant downward pressure" on oil demand over the near term because of cyclical and secular factors.

 

 

For the cyclical, it's about the recent International Energy Agency report showing oil demand dropping 0.3 million barrels per day, the first decline since the recession was ending in the third quarter of 2009. Even China's demand was flat year over year. The fact that Europe is likely in the midst of a new recession should keep a lid on energy consumption. Greek oil demand dropped nearly 9% in 2011.

 

 

And for the secular, consumers are simply becoming less energy intensive. This is borne out in this week's U.S. Energy Information Administration report. Total petroleum produce supplied to the domestic market was down 4.2% in the week ended Jan. 20 compared with the same period in 2011 and was 13% below the levels seen in the midst of the recession in early 2009. Gasoline demand was particularly weak, down 6.4% from last year and 10% from 2009.

 

How long should crude be on the down slope? My guess is until the Fed shoves the dollar lower by announcing QE3 at its March or April meeting.

 

For now, I'm adding the ProShares UltraShort Crude Oil (SCO) to the Edge Letter Sample Portfolio to take advantage of the pullback.

 


Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

 

The author can be contacted at anthony@edgeletter.c​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


 

115Comments
Feb 2, 2012 5:56PM
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I just don't understand how their allowed to speculate on something (that never happens) to raise the price of oil. I speculate that kids going to break his leg while playing football but I don't take him to get a cast on it until it happens. There should be a law against it. Don't raise the price until the speculation becomes reality.
Feb 2, 2012 5:13PM
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Who are you trying to kid. Gas prices over the long run will continue to rise, until we develop another source of energy.
Feb 2, 2012 5:44PM
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While in theory the article makes sense we all know OIL prices will not fall & if they do it will be mere pennies.  Let's face it Wall Street & the speculators control the price and they will use every excuse in the book to increase the barrel price.  An example of this would be later this month we are bidding on OIL futures for the summer driving season which the last time I looked doesn't start till June.  Or the refineries will be shut down to change over the gas mixture which will cause the price to rise or someone will see a gust of wind blow off the coast of Africa & "fears" of a Hurricane that hasn't even formed will spike prices. They have an excuse for everything and as far as I am concerned gas is worth about $2.00 a gallon at the pumps.  What we are paying now is highway robbery.
Feb 3, 2012 1:58AM
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Why don't we get congress to OK the pipeline instead. The hell with Iran!  Let them keep their oil and we can buy it from  Canada and Alaska.
Feb 3, 2012 12:08AM
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There are two components to the cost of oil and gasoline.  One is the market cost based upon real world expectations, thus the price rise with the Iranian threats.  Two is the speculative market portion where people with no intent of taking posession of the commodity bid against the market and not  real world events for or against oil and gasoline.  This second portion of the oil and gasoline markets often, if not typically, feeds upon itself and drives prices up regardless of the market events based upon real expectation for oil and gas.

 

If you want to get rid of the second aspect, remove players from the market who lack the capacity to take delivery.  Only around 5% of the market needs to be speculative for it to work effectively, $.10-.15 currently, and we are at around $1.00-$1.25 now.  This means that we should be at approximately $2.40/gal. of gasoline today and not $3.70.  The difference is the result of speculation that stimulates the market to excess price, and also raises volatility.

 

The fact that we have insufficient political will to remove the excess speculative aspect of the oil and gasoline markets is not a statement about the ability to do so, only about Congressional support for the oil industry.

Feb 2, 2012 6:19PM
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by the mere fact that oil is traded by wall street banks means we are screwed
Feb 2, 2012 7:57PM
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Gas has went up here over $.30 a gallon in less than a week and now they are saying it is going to receed probably back down $.25 cents so they are still above where they want to be. All MANIPULATED BULL$HIT. A different story next week to contradict this one.

JOB SECURITY!!!!!!!!!

Feb 2, 2012 8:11PM
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You are right monstahead and the same with the presidential election. It doesn't matter who is put up there, until the rules they are allowed to operate by are changed it will be business as ususal.  Same as this BIG OIL CRAP!! The raping of this country by big oil started after hurricane Katrina and hasn't let up since. They seen they could get away with.

Feb 2, 2012 6:06PM
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OIL PRICE CAN GO UP OR DOWN. THE BOTTOM LINE YOU WILL NOT SEE GAS PRICES GO DOWN TO WHERE OIL PRICE INDICATE THEY SHOULD BE. TO MANY MIDDLE COMPANIES.
Feb 2, 2012 9:55PM
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Supply and demand has nothing to do with the price. Price is set at all you can get plus 10 percent.

History shows that price still remands high even when demand is low.

Feb 2, 2012 9:36PM
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This article is the same knuckelhead who was warning about 5 dollar gas a while back these guys know squat the market is at the mercy of speculators make them settel at the end of each day and watch the price of oil fall. what a bunch of theives
Feb 2, 2012 10:13PM
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Manipulation of gas prices is just another way of control. If the gas price goes up it's because they want you angry at your leaders if they go down they are happy with your leaders and want you happy too. Most of us already know the other cycles like summer gasoline hikes and winter fuel oil hikes no matter what supplies are available. 
Feb 2, 2012 5:49PM
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keep up the good work.   Dont buy gas.   lets make them drop the price of gasoline.    we need a break     Smile
Feb 2, 2012 11:43PM
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sure would be nice. that is why this country needs to drill wherever there is oil. not approving the pipeline is really really stupid.
Feb 2, 2012 5:41PM
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big oil will not allow thier profit margin to dip or even stagnate for that matter.
Feb 3, 2012 3:51AM
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Tell me oil is going to be cheaper in a month after Israel bombs the **** out of Iran !
Feb 2, 2012 6:41PM
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They will always find an excuse for prices to be high...oil companies are used to record profits and want to keep that going.  Even when it goes down, it does so much slower than the speed in goes up.  Speculators will keep it high one way or another.
Feb 2, 2012 7:35PM
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until we develop another source of energy.

And it will be traded the same as gas and oil and we will be raped by it too.

 

big oil will not allow thier profit margin to dip or even stagnate for that matter.

This is a FACT!!!!!!!

 

 

Feb 3, 2012 8:14AM
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The Consumer can't and will never win with Oil!

 

Stock prices manipulated and the oil companies make INSANE profits!

 

$$$$$$ 9, 6 0 0, 0 0 0, 0 0 0 IN 3 MONTHS.

 

THAT IS SICK.

 

Chip

Feb 3, 2012 1:38PM
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  • Revolts in North Africa cause stupid panic, oil speculators capitalize on the fear and jack up oil prices.  No oil supply is disrupted, supply is not affected, demand is down, but the price remains high. WHY? 
  • We do not buy oil from Iran, but their bronze-age government threatens to cause destruction in the region.  Again, Speculators jack up the price of oil.

Greedy speculators "buy" oil and add undeserved profits by selling it back at a higher price.

  • No oil is lost.
  • Supply is not disrupted.
  • Demand is down.
  • Greedy speculators gouge the market and steal ten percent or more.

There should be rules that only allow real oil companies to buy oil.  If you do not own a production, storage, distribution or delivery facility, why are you allowed to buy oil???

 

Markets exist because we allow them exist because they add value to society by driving down the price for goods and services.  Gouging Americans is not to our interests, we should prohibit, or tax a lot for manipulating the prices of important products like oil, food and medicines.

 

Capitalism is not bad, as long as it serves society first and profit motives second.  But when it gets used like this, it amounts to theft.

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