Posted on 09/14/2006 9:28:58 AM PDT by Uncledave
Oil's slide could push gas to $1.15 Tension in oil-producing regions is easing, and stockpiles of crude are approaching 1990 levels
Kevin G. Hall, McClatchy Newspapers
WASHINGTON - The recent sharp drop in the global price of crude oil could mark the start of a major sell-off that returns gasoline prices to lows not seen since the late 1990s -- perhaps as low as $1.15 a gallon.
Philip K. Verleger, a noted energy consultant who was a lone voice several years ago in warning that oil prices would soar, now says that they appear to be poised for a dramatic plunge.
Crude oil prices have fallen about $14, or roughly 17 percent, from their July 14 peak of $78.40. After falling seven straight days, they rose slightly Wednesday in trading on the New York Mercantile Exchange, to $63.97, partly in reaction to a government report showing fuel inventories a bit lower than expected. But the overall price drop is expected to continue, and prices could fall much more in the weeks and months ahead.
Here's why.
For most of the past two years, oil prices have risen because the world's oil producers have struggled to keep pace with growing demand, particularly from China and India. Spare oil production capacity grew so tight that market players feared that any disruption to oil production could create shortages.
Fear of disruption focused on fighting in Nigeria, escalating tension over Iran's nuclear program, violence between Israel and Lebanon that might spread to oil-producing neighbors, and the prospect that hurricanes might topple oil facilities in the Gulf of Mexico.
Oil traders bet that such worrisome developments would drive up the future price of oil. Oil is traded in contracts for future delivery, and companies that take physical delivery of oil are just a small part of total trading. Financial players, such as large pension and commodities funds, are the big traders and they're seeking profits. They've sunk $105 billion or more into oil futures in recent years, according to Verleger. Their bets that oil prices would rise in the future bid up the price of oil.
That, in turn, led users of oil to create stockpiles as cushions against supply disruptions and even higher future prices. Now inventories of oil are approaching 1990 levels.
But many of the conditions that drove investors to bid up oil prices are ebbing. Tension over Israel, Lebanon and Nigeria are easing. So far this year, the hurricane season has presented no threat to the Gulf of Mexico. The U.S. peak summer driving season is over, so gasoline demand is falling.
With fear of supply disruptions ebbing, oil prices began sliding. With oil inventories high, refiners that turn oil into gasoline are expected to cut production. As refiners cut production, oil companies increasingly risk getting stuck with excess oil supplies. There's already anecdotal evidence of oil companies chartering tankers to store excess oil.
All this is turning financial markets increasingly bearish on oil.
"If we continue to build inventories, and if we have a warm winter like we had last winter, you could see a large fall in the price of oil," said Gary Pokoik, who manages Hedge Ventures Energy in Los Angeles, an energy hedge fund. "I think there is still a lot of risk in the market."
As it stands now, the recent oil-price slump has brought the national average for a gallon of unleaded gasoline down to $2.59 a gallon, according to the AAA motor club.
Should oil traders fear that this price slide will get worse and run for the exits by selling off their futures contracts, Verleger said, it's not unthinkable that oil prices could return to $15 or less a barrel, at least temporarily. That could mean gasoline prices as low as $1.15 per gallon.
Other experts won't guess at a floor price, but they agree that a race to the bottom could break out.
"The market may test levels here that are too low to be sustained," said Clay
Seigle, an analyst at Cambridge Energy Research Associates, a consultancy in Boston.
On Monday, the oil-producing cartel OPEC hinted that if prices fall precipitously, OPEC members would cut production to lift them. But that would take time.
"That takes six to nine months. If we don't have a really cold winter here (creating a demand for oil), prices will fall. Literally, you don't know where the floor is," said Verleger. "In a market like this, if things start falling ... prices could take you back to the 1999 levels. It has nothing to do with production."
ill believe this crap when i see it.
$1.15 a gallon? Wow, I can stop buying bologna by the case for feeding the family, now!..........
It can only go so low because of the confiscatory taxes placed on it.
One thing is for sure...Democrats will be deeply saddened if it comes to pass.
I'd just like to see it about $1.80 a gallon by a week before election day.
Gov will not allow it, think of their loss of tax revenue.
That, is why no matter how much you make, the price never gets lower.
I won't be sad to see the end of all the spite wells
around here!
"Rove you magnificant bastard" bump.
Shalom.
If this happens, we need to build a lot more roads.
One thing is for sure; the price of crude is dramatically affected by profit-takers and market-manipulators, fwiw.
Just another opinion, but I think he called gasoline going through the roof.
So while I think this is too optomistic, who knows.
And would kill off efforts to develop alternative fuels.
I hope the price settles in about $45-50/bbl. A price that people can afford, but also a price that encourages more exploration and more alternative fuels development.
OPEC after all these years has learned that if they set production limits and all the member stick with then that they can control the price of oil. With this understanding they will let the price fall 25-20% but not 75%.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.