March 1, 2024

Price of Crude Oil Falls Again, but Analysts Warn It Will Remain at Lofty Levels

 HOUSTON — With the Memorial Day weekend and summer driving season coming soon, the sudden drop in oil prices could mean that drivers will find moderately lower gasoline prices at just the right moment.

But many energy analysts and economists predict that oil and gas prices will remain stubbornly high.

Supplies remain constrained by turmoil in the Middle East and North Africa, oil specialists said, and there is always the possibility that conflict could cut production in Nigeria. At the same time, expanding economies like China and India continue to drive the growth in oil consumption.

“Nothing has changed, except psychology and taking profits,” Allen Sinai, chief global economist of Decision Economics, a consulting firm, said of this week’s selloff in the oil futures market. “This is a correction, and not a shift in trend.”

Light sweet crude, the benchmark of New York trading, fell below $100 on Thursday for the first time since March, but it remains almost 30 percent higher than a year ago. At the close on Friday, oil for June delivery was down $2.62 at $97.18 a barrel.

Gasoline prices fell a fraction of a penny on Friday, according to AAA’s daily gas gauge. But with the average regular gallon costing $3.98, that is still 28 cents higher than a month ago and a $1.06 more than a year ago.

Other commodities were mixed after a sharp selloff on Thursday. Gold and cocoa were higher, while silver, wheat, cotton and copper were lower again on the day.

Tom Kloza, chief oil analyst of the Oil Price Information Service, predicted that the average price for a gallon of regular gasoline would fall to $3.75 by Memorial Day and to $3.50 later in the summer. Those are still historically high prices, taking consumers back to a level they were paying earlier this year.

President Obama, speaking to auto plant workers in Indiana on Friday, acknowledged the public frustration over high gas prices. “We’ve got high gas prices that have been eating away at your paychecks and that is a headwind that we’ve got to confront,” he said.

Meanwhile Attorney General Eric H. Holder directed a special task force to examine whether reductions in oil prices were being passed on to consumers. “Fraud or manipulation must not be allowed to prevent price decreases,” Mr. Holder said in a memo.

Corrections, even sharp ones, are not unusual as commodity prices follow longer trends up. A Barclays Capital research note on Friday observed that on several occasions last year, weak economic data pushed oil prices down to $70 a barrel. “Those periods were indeed short-lived,” Barclays noted, before oil prices continued their march upward.

While commodity traders move oil markets up and down from day to day, the fundamentals of supply and demand are the drivers from month to month and year to year. Though the fundamentals continue to point higher, oil prices are not expected, at least anytime soon, to return to the levels reached in 2008 when a barrel of crude neared $150 a barrel.

The Energy Department predicts moderately tightening world markets. The department last month estimated that world consumption would grow by an average of 1.5 million barrels a day in both 2011 and 2012. Despite more drilling in OPEC and non-OPEC countries, the department projected that supplies would increase to meet only roughly half the added demand this year and roughly 80 percent of the added demand in 2012.

International financial analysts and oil experts have been predicting a correction for some time in oil prices, since there are ample supplies at the moment. But many think oil prices are going higher in the second half of the year.  

“Worldwide, the macro picture has not changed,” said Andy Lipow, a former Amoco trader who is president of his own Houston consulting firm. “Oil demand around the world continues to increase at the same time we are experiencing a supply disruption in Libya as well as a reduction of supplies from the Gulf of Mexico.”

He predicted that the price of oil would return to the $110 a barrel level by the end of the year. The Macquarie Group projected in a commodities research note this week that light sweet crude would average $110 a barrel this year, $115 in 2012 and $117 in 2013.

The military stalemate in Libya has taken over a million barrels a day of high-quality crude off the market, and oil fields and terminals have been damaged in the fighting. Meanwhile nearly half of Yemen’s 260,000 barrels of daily production is offline. That is a relatively small amount, but Yemeni crude is also a high-quality product that refiners find difficult to replace.

Saudi Arabia promised earlier in the year to increase its production capacity, but it actually cut production recently, claiming that the world markets were flush. Whether the kingdom steps up production remains to be seen, and energy experts are watching closely to see what if any decisions are made on OPEC production and prices at the organization’s next meeting in June.

Recent International Energy Agency and Energy Department reports predict that China, India, other developing nations and the Middle East itself will continue to consume more oil as they build factories and their middle classes add thousands of cars every week to the world fleet.

The Energy Department reported that crude inventories last week had risen by 3.4 million barrels, because American gasoline consumption has been slowing. Consumption may rebound somewhat as prices ease again, energy experts say. Meanwhile, after the earthquake in Japan, demand for oil was down by about 30,000 barrels a day. That reduction was less than expected, and Japan will almost certainly import more oil as its economy recovers and it replaces some nuclear generation with heating oil.

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