Cheaper oil ahead?
After suffering higher pump prices, consumers could be due for some relief.
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.
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.
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.
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.
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.
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!!!!!!!
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.
- 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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All hail the bull market, which ended the week with a big rally. But it also is starting to look a little like 1987, which suffered an epic blow-out.
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