Oil and gas destined to fall as prices pinch consumer demand

Friday, April 8th, 2011 By

gas prices

Despite rampant speculation, oil and gas prices are expected to stabilize when consumers reach their breaking point. Image: CC Walter Baxter/Geograph

Oil prices are soaring, and gas prices are approaching levels not seen since the summer of 2008. The U.S. has huge oil and gasoline stockpiles, but speculators betting on risk and fear have pushed oil prices up 21 percent in 2011. Some analysts think the oil rally is about to end, however, as rising oil and gas prices reduce consumer demand.

Oil rally continues, for now

In early trading Friday light, sweet crude for May delivery rose to $111.90 a barrel on the New York Mercantile Exchange, the highest level since September 2008. U.S. gas prices reached an average of $3.70 this week, their highest level since the summer of 2008 as well. Analysts credited a number of factors to the oil price surge. A looming government shutdown is weakening the dollar, which makes dollar-based commodities such as crude oil more affordable for traders betting with other currencies. The markets are also betting that the conflict in Libya won’t end in the near future; Libya has reduced its oil production of 1.3 million barrels a day to a trickle. But as U.S. consumers pay a little more every day at the pump, the U.S. is awash in oil. According to the U.S. Energy Information Administration, U.S. oil inventories rose by 2 million barrels in the week ending April 1. Crude refinery input rose to more than 14 million barrels per day.

Speculators suspend law of supply and demand

The U.S. used to blame OPEC for its oil shocks, but OPEC’s role in higher oil prices has been diminished. At an oil conference in Paris, the oil minister of the United Arab Emirates said that there is little OPEC can do to control prices. Mohammed bin Dhaen al-Hamli said that OPEC is providing the market with the oil it needs. Oil prices are rising, he said, because traders are ignoring market fundamentals and betting on worst case scenarios. Oil speculators are being aided and abetted by the Federal Reserve, which has been giving hedge funds and pension funds money at zero percent interest so they can bet on rising commodity prices. Analysts estimate that because of speculators, oil futures are $15 to $20 higher than they should be. The next betting frenzy could be triggered by elections this weekend in Nigeria, where output of 2.2 million barrels a day could be disrupted by violence.

Is the oil tipping point on the horizon?

There are signs that oil and gas prices have risen to a level that U.S. consumers can no longer afford. Gasoline demand has fallen 3.7 percent over the past four weeks. Some analysts are saying that oil prices will reach a tipping point soon, unless another crisis in the Middle East or a Nigerian meltdown play into the hands of oil speculators. Before the Fed’s second quantitative easing plan (QE2) began last fall, oil was at about $90 a barrel. As rising prices continue to constrain consumer demand, when quantitative easing ends in June and the free money spigot is turned off, oil and gas speculators could reduce their position by as much as a third, stabilizing crude oil prices at between $85-$95 a barrel.

Sources

Wall Street Journal

New York Times

Industrial Fuels and Power

Fortune

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