A Global Slowdown
Second, some major economic forces are at work. With Europe’s debt problems ever-worsening, the drop in crude prices also is a direct reflection of that fact. Analysts now worry that the continent will enter a recession. That would certainly put a damper of oil demand for the near future.
Also restraining demand is emerging-market leader and No. 2 crude consumer China, where data in recent months has suggested that growth is weakening. The interdependent relationship between China, the U.S. and Europe will play havoc with Chinese crude demand. After all, China relies on those other two markets as a major destination of its exports. With Europe falling into recession, China will see less demand for its goods, and therefore it’ll need less energy. According to investment bank HSBC’s (NYSE:HBC) latest Chinese manufacturing report, factories in the Asian Dragon contracted in May for the seventh consecutive month.
Indeed, Beijing has set a target of 7.5% GDP growth this year. That’s down from 9.2% in 2011 and 10.4% in 2010.
Add these factors together, and it’s no surprise that oil futures have plunged around 15% in just three weeks. Currently, West Texas Intermediate crude (WTI) is around $90 a barrel, while Brent crude sits at around $105. Prices for both benchmarks are near seven-month lows.
So, that’s how we got here. Now …
… Will It Last?
Over the short to near term, most likely. If everything continues to play out as it has for the past several weeks, 2012 could be a great summer driving season. Crude demand from Europe and China should keep dropping as their economies slow, although 7.5% GDP growth for China is still quite impressive compared to the rest of the world.
So, yes, we’re quite likely to see somewhat lower gasoline prices for the remainder of the summer.
However, the long-term story could be completely different. While China’s demand is ebbing a bit, a whole host of other emerging nations are getting their first tastes of petroleum. That’ll continue to put pressures on long-term demand.
Second, even as U.S. pipeline build-outs relieve the Midwest oil glut, some analysts say previously landlocked WTI will once again become a global benchmark. That could result in higher prices as firms sell their production on the global markets.
Finally, though tensions with Iran seem to be cooling, things could get ugly quite quickly. Talks may fail again to create a resolution. And Israel is wary of recent nuclear negotiations with Tehran and has voiced its stance on stopping hostile neighbors. All of these pressures could easily push crude and gasoline prices higher over the long run.
In the meantime, enjoy the lower gasoline prices while you travel this holiday weekend and get ready to plow some of that cost savings into energy stocks for the long term. They’ll get cheaper, too, as crude continues to drift lower, for now.
As of this writing, Aaron Levitt doesn’t hold any securities mentioned here.