Oil Prices Below $90, But for How Long?

by Dan Burrows | October 4, 2012 12:50 pm

moneyoilbarrel Oil Prices Below $90, But for How Long?Are declining oil prices good or bad news for the economy?

Both.

Lower energy costs put more money into consumers’ pockets and help boost most companies’ bottom lines (well … not energy companies), but they’re also symptomatic of the weak global economy.

As China slows, the U.S. grows just above stall speed and Europe remains mired in recession, supply is outstripping demand. Indeed, inventories are at record highs for this time of year.

Armed conflict between Turkey and Syria and a weaker dollar helped New York-traded crude oil futures bounce back Thursday after tumbling more than 4% in the prior session, but they’re still below $90 a barrel and remain close to a two-month low. Just have a look at the chart below, showing benchmark crude traded on the New York Mercantile Exchange[1]:

crude Oil Prices Below $90, But for How Long?

From a macro perspective, declining prices are troubling because, if anything, oil prices should be climbing. Tension in the Middle East — from violent protests in Libya to shelling in Syria to the Iran-Israel showdown — should have speculators bidding up the price of crude.

And, if history is any guide, the Federal Reserve’s third round of quantitative easing should be giving oil and other commodities a lift. It has in the past. QE usually pushes down the dollar, boosting anything priced in greenbacks or seen as an inflation hedge.

But slower growth from Asia to Europe — and a big jump in domestic production, thanks to shale deposits and new drilling technology — has traders fretting that there’s more energy than needed in the months ahead.

And, with the exception of the coasts, that has gas prices heading lower, too. True, demand for gas usually declines in the third quarter as Americans drive fewer miles and refineries in the U.S. and Europe go back online after shutting down for regular maintenance periods. But analysts expect an even steeper drop this time around.

The national average for a gallon of regular gasoline stands at $3.78, according to the AAA Daily Fuel Gauge Report[2]. Yes, that’s 38 cents higher than a year ago, but it’s also 4 cents lower than a month ago — and analysts see prices heading down even more. Prices at the pump could drop to $3.54 a gallon in the months ahead, according data compiled by Bloomberg.

Although that’s good news for consumers, it’s not so great for energy stocks. After rallying sharply on the expectations and then delivery of more central bank stimulus, the oil majors have been moving sideways in volatile trading since mid-September.

ExxonMobil (NYSE:XOM[3]) has stalled out since hitting a year-to-date high of $92.30 on Sept. 13, Chevron (NYSE:CVX[4]) is flat over the same period and ConocoPhillips (NYSE:COP[5]) has slipped about 1.8%.

Of course, all of that could turn on a dime if geopolitical developments trump the fundamentals of supply and demand. The clock is ticking on an Israeli response to Iran’s nuclear program and tension is heating up between Turkey and Syria.

Oil prices, as always, are just a headline away from spiking.

If you’re an investor, that provides something of a floor to your energy stock picks. And if you’re a consumer? Well, enjoy any relief while it lasts.

As of this writing, Dan Burrows held no positions in any of the aforementioned securities.

Endnotes:
  1. New York Mercantile Exchange: http://www.cmegroup.com/trading/energy/crude-oil/light-sweet-crude.html
  2. AAA Daily Fuel Gauge Report: http://fuelgaugereport.aaa.com/?redirectto=http://fuelgaugereport.opisnet.com/index.asp
  3. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  4. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  5. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP

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