By JONATHAN FAHEY and CHRIS KAHN
AP Energy Writers
(AP:NEW YORK) The price of oil suffered its biggest one-day decline in nearly six months Friday, falling below $100 per barrel for the first time since February. A drop in gasoline prices can't be far behind.
It's a welcome trend for motorists, with the summer driving season just around the corner. And it eases some pressure on the U.S. economy, which has shown only agonizingly slow growth in the nearly three years since the Great Recession ended.
Oil fell $4.05, or 4 percent, to $98.49, after a weak U.S. jobs report offered the latest evidence that the global economy is weakening, possibly reducing demand for oil. At the same time, there is mounting evidence that world oil supplies are growing.
"The jobs report was the coup de grace," said Judith Dwarkin, chief energy economist at ITG Investment Research. "But it's hard to see how prices could have stayed on the boil given ample supplies and continued economic uncertainty."
For the week, oil fell more than $6 and is now about $12 below its February high. U.S. gasoline prices have fallen to $3.80 per gallon from a peak of $3.94 in early April.
Now they could go as low as $3.50 per gallon by July 4, according to Tom Kloza, Chief Oil Analyst at the Oil Price Information Service.
Tony Wei, a mechanical engineer from Piscataway, NJ., will welcome lower prices. He travels 100 miles every day to and from his job in Morris County, N.J. He's also planning a 500-mile trip to Canada and a 400-mile trip to southwest Virginia this summer in his Honda Accord.
"Definitely, I'm going to notice it," he said. "I buy so much gas."
The picture of the oil market is the reverse of just a few months ago. Then, world oil demand looked to be rising quickly at the same time that world supplies were threatened by a host of small production outages and the potential for drastically reduced production from Iran, the world's third-biggest exporter.
Those developments raised the prospect that world supplies would be at their most tenuous just as the summer driving season arrived in the developed world. The price of U.S. benchmark oil rose to about $110. The price for international oil used to make most of the gasoline in the U.S. spiked even higher, to $128 per barrel.
Gasoline prices in the U.S. appeared to be on track to soar past $4 per gallon nationwide, another burden for U.S. consumers already suffering from high unemployment and pitiful wage growth.
Now the worst of those price fears have melted away for a number of reasons:
_ Falling demand: A spreading recession in Europe and slow growth in the U.S. suggests energy consumption, which fell 0.4 percent worldwide in the first quarter, will remain weak.
_ Growing supplies: Saudi Arabia and other OPEC members are pumping more oil. Energy companies are employing cutting-edge drilling technology to ramp up production across the globe. World oil supplies grew on average by 1.35 million barrels per day in the first quarter, and producers should easily meet demand in the coming months.
_ Easing political tensions: The West's nuclear standoff with Iran appears to be cooling off. The threat of conflict _ and less Iranian crude on the market _ helped push oil prices past $100. But now Iran and the West are planning talks.
The price of oil hasn't dropped this much since Dec. 14, 2011, when it fell by $5.19, or 5.2 percent, to $94.95 per barrel.
Oil prices may drift even lower in coming weeks, but analysts don't expect a dramatic plunge. World demand, though weaker than predicted, is still expected to set a record this year.
While Iran and the West are talking again, similar talks have not led to a resolution in the past. A breakdown in those talks could renew fears of supply disruptions and send prices back up.
Unfortunately, while the drop in oil and gasoline prices should help the U.S. economy _ or at least insulate it from further damage _ it isn't likely to give the economy a major boost, economists say.
A 14-cent drop like the one seen recently would save the typical American household $13 over a month. If sustained over a year, that drop would save U.S. drivers about $20 million.
"The problems plaguing the U.S. economy are much bigger than the oil price," Dwarkin said.
I like Chris M's thought what are they trying to hide by allowing Oil prices to fall??? Oil like Gold and Silver is politically manipulated. Unfortunately the average Joe has never worked this out so he believes their fairy story that lower job creation numbers brought the oil price down?? Actually its quite sad how many people believe what they are told and never question it??
Oil is the most "political" commodity there is. Governments always have a thumb on the scale. This is an election year. 2+2=
so right, Mike.
My theory: It was the super-moon that sent oil to its biggest drop in 6 months. Or you think just maybe it was related to the buildup of inventory of oil and natural gas supplies that have been months in the making?
Well there could be causality. I think when you buy/sell crude oil derivatives you bear the actual market in mind. If you think there will be less demand, you'd tend to take the short side. It sounds credible.
But please let me argue for another point of view which tickles the little grey cells and can cause a lot of thinking.
The rise of the oil price in 2008 led to a public outcry and various interviews with OPEC bosses on telly who were unable to explain why the price went up as they were pumping out oil which nobody seemed to want. If there really was a higher demand, the refineries would have increased their output, but it didn't happen. This rise was caused by speculation alone, as everybody wanted out of stocks and looked for other places to go. It has raised a few eyebrows and drew some unwanted attention to the commodity futures markets.
CME Group, which runs NYMEX, offers both "physically" and "financially" settled contracts. With the former, the last owner ends up with actual oil, whereas the last owner of the latter gets money instead. Guess what the vast majority of contracts is.
This is a somewhat hot topic and CME argue their best to avoid action which could reduce the number of contracts exchanged in their market (see cmegroup.com/company/files/PositionLimitsWhitePaper.pdf). Another interesting read is isda.org/speeches/pdf/Onion-futures-Annex.pdf which defends the "wind markets". Just ignore the maths which, er, prove that speculation is good against volatility. Interesting that Lincoln and Lenin shared the same blood-thirsty opinion.
When you bear all this in mind, the drop of the oil price could be 1) a reaction to expected drop in demand, as the blog suggests, or 2) just a sign that many people feel they should now invest their money elsewhere and get out before everybody else wants out, too - this should be interesting to watch and we might see quite a drop. In case that no. 2) applies, the most interesting question is not "why now?" but: where is all the money going NEXT?
Interesting thought about Case #2. If the market starts going up again, then I think we have the answer. Aside from the past couple days, the straight up the past few months in spite of so much bad news and numbers tells me the money is coming from somewhere. Up until now my guess has been Europe. Now it seems everyone wants out of commodities. Witness gold, silver, oil, Rare Earths, Corn etc. selling off the past few days. I'm thinking about going long SSO again.
Get wise; the oil markets are manipulated just as is the gold and silver markets, These markets no longer reflect the fundamentals of supply and demand.
Uhh....I'm not buying the idea that oil dropped because of a jobs report. Not that I'm an expert in any of this but I'm not buying that. This sounds like the kind of thing people are told so they won't find out the real reason.