Gas and oil prices are heading in the right direction, finally. But the reasons why might be no cause for celebration.
Story Credit: Ron Hurtibise, South Florida Sun-Sentinel
Traders drove down the price of U.S. crude oil by 11% over the past two weeks and gas prices followed suit, dropping 12 cents a gallon to a national average of $4.90, travel club AAA said in its weekly gas price update.
Patrick De Haan, head of petroleum analysis for the price comparison website GasBuddy.com, said gas prices could continue dropping another 25 to 30 cents over the next couple of weeks, barring a hurricane or other unforeseen supply problem. “We’re probably halfway done,” he said, referring to the price decline.
The price of a barrel of U.S. crude oil fell from a high of $122.75 on June 10 to $101.53 at one point during trading on June 22. On Monday, however, it was hovering back up in the $110 range.
According to AAA, the drop in oil and gasoline futures prices stemmed from traders’ concerns about an overall drop in U.S. economic activity following the Federal Reserve Board’s three-quarters-of-a-percentage point increase in benchmark interest rates on June 15 — the most aggressive hike since 1994.
While the Fed’s action was intended to curb inflation, economic analysts said it would slow economic activity by making it more expensive for businesses to borrow money, buy machinery, and purchase commodities used in manufacturing. That in turn will cause them to slow hiring or even lay off workers, which would reduce discretionary income.
Economic slowdowns typically lead to downward pressure on oil and gas prices if fewer goods are being made, fewer trips are needed to move them, and fewer consumers are driving to stores to buy them.
De Haan said economic concerns are a big reason for the price drop, but another reason could be that oil prices rose as high as traders believed they could go, and many decided to pull out of the market, triggering the decline.
“They get the jitters that the market is overbought,” he said. “When prices are that lofty, you don’t need a whole lot to turn them around.”
Fundamentals of the oil and gas market hadn’t changed significantly since prices hit record highs, he said.
Consumer demand continues to increase despite high prices. “We complain about it, but we keep buying it,” he said.
The number of U.S. oil rigs in operation was up by 13 to 753 last week — 283 rigs more than a year ago — and refinery activity remains high as companies take advantage of elevated profit margins, according to data from the U.S. Energy Information Institute. Still, U.S. crude oil inventories were 10% lower than a year ago and gasoline inventories were down 10.5% over last year.
For now, the economy is still humming with low unemployment rates and pent-up demand for summer travel still high.
AAA forecasts auto travel to set new records over the July 4 weekend as 151,000 more motorists hit the road compared to last year. More than 42 million Americans, including 2.3 million Florida residents, will drive 50 miles or more over the holiday weekend, AAA projects.
And they’ll be paying about $25 more to fill their gas tanks compared to last year, and more than during any previous July 4 in history, AAA spokesman Mark Jenkins said.
De Haan cautioned consumers not to become complacent about falling gas prices.
U.S. crude oil prices on Monday afternoon rebounded to around $110 — up nearly $3 from Monday’s opening price of $107.22 and up $6 from Friday’s opening price of $103.99.
“Motorists should be wary,” De Haan wrote in his blog, “that while the [gas prices] decline could continue for the week ahead, any sudden jolts to supply could quickly cause a turnaround, and risk remains that when the peak of hurricane season arrives, we could see a super spike at the pump.”
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