How low will oil fall? $30 is possible

Look out below! The plunge in oil prices may not be over just yet.

Oil took another hit Wednesday, sinking below $53 to a level last seen during the Great Recession. It’s hard to recall that crude oil traded for over $100 a barrel as recently as July.

Few saw the energy meltdown coming. Now that it’s here, industry analysts warn another move lower is possible as the momentum remains firmly to the downside.

“If this doesn’t hold, we could go back to price levels in late 2008 and early 2009 — down in the $30s. There’s no reason why it couldn’t happen,” said Darin Newsom, senior analyst at Telvent DTN.

That would be good news for the overall U.S. economy, especially consumers who are saving money each time they fill up their gas tanks. If oil fell to around $40 a barrel, that would translate to a national gas average of roughly $1.80 a gallon.

Yet lower prices are also pinching the oil industry, including the previously red-hot Texan economy and high-cost U.S. shale and Canadian oil sands producers. Several thousand layoffs in the energy sector have already been announced.

Why is oil so cheap? The oil plunge has been fueled largely by excess supply caused by the North American energy revolution.

In an effort to squeeze these new players and maintain market share, OPEC exacerbated the oversupply problem by deciding to keep production steady in late November.

“It really is pretty mathematical. There is more oil than we need,” said Tamar Essner, energy analyst at Nasdaq Advisory Services.

Slowing demand for oil: The world’s appetite for oil no longer looks insatiable. That’s largely due to the slowing Chinese economy. The country’s oil demand had been growing at incredible rates, but now it’s in the low single digits.

“Their economy is maturing. Just by definition it’s going to need less oil,” said Essner.

Global demand is also being slowed by the fact that the U.S. and other mature economies have become more fuel efficient.

“If you look out your window and watch cars going by you don’t see huge gas guzzlers as much. When the market spiked to $140, we actually saw a change in consumer habits,” said Newsom.

Now that the U.S. and Canada have moved towards energy independence, scary headlines out of the Middle East no longer seem to spook the energy markets. The so-called “geopolitical risk premium” built into the price of oil has all but vanished.

“So much supply was contingent on the Middle East where there was always the potential for things to go haywire,” said Essner.

She pointed to recent supply disruptions in Libya that had no impact on oil prices. In fact, prices kept dropping.

What’s next: This is hardly the first time oil prices have suffered a dramatic tumble. A supply glut and economic turmoil in Asia caused prices to collapse in the late 1990s.

One key difference between then and now is how much oil has grown as an asset class for investors.

That could increase the chances of a downward spiral as investors panic and dump their holdings, said Tom Kloza, global head of energy analysis at the Oil Price Information Service.

“If panic hits those financial companies that have a lot of exposure to oil on the upside, the numbers you may think are burlesque or hyperbole like $35 or even $25 suddenly become real possibilities, if only for a brief period of time,” said Kloza. “Anything can happen in 2015.”

via How low will oil fall? $30 is possible – Dec. 31, 2014.

Why are Gas Prices falling so much?

Nationwide gas prices have dropped to $2.26. That is down from $2.78 a month ago and $3.30 a year ago. Because gas prices vary from area to area, three states have posted prices below $2 in the past several days. These are Missouri at $1.91, Oklahoma at $1.94 and Kansas at $1.99.

Low gas prices are usually based on three factors. The largest is the price of oil. The next is proximity to large refineries, which affects transportation costs. The last is state gas taxes.

I must think though, with plummeting prices at the pump, lawmakers are given the room they need to hike taxes on gasoline for the first time in more than 20 years – and on Sunday a key Republican senator refused to rule it out as a method of assuring funding for federal highways.

The federal gasoline tax is 18.4 cents per gallon, and has been since 1993 without being indexed for inflation. The main reason the tax has held steady is the political cost of an increase in the cost of a commodity that a vast number of Americans buy on a regular basis.

However, the failure to index the tax to inflation means that the revenue it brings in covers less and less of the costs associated with maintaining and upgrading the U.S. highway system. Add to that the fact that the legislation providing money for the Highway Trust Fund expires in May, and it’s easy to see why some lawmakers believe it’s time to drag the federal gas tax into the modern day.

The Dow fell more than 300 points and finished the week with a 3.8% loss. That was its worst weekly performance in more than three years. Might be a good time to invest in Crude. 🙂

When you fill the tank, have you noticed that it leaves your wallet a little less empty? Gas prices have been falling for months, and they should continue their decline throughout 2015.

The national average is expected to drop 23 percent in 2015 to $2.60 per gallon, according to the federal Energy Information Administration. If that projection holds, it would mean an average savings of 77 cents per gallon throughout the year.

That’s a lot more than pocket change. According to a Bankrate analysis of government petroleum statistics, each American driver stands to save about $452 on gasoline in 2015.

All told, the lower prices could pump more than $100 billion into the American economy over the course of the year.

Why are gas prices likely to keep falling? You can thank a variety of market forces that are working together to push prices lower. Here are four of the main ones, and how each will make it less expensive to drive in coming months.

American oil producers have been on a tear lately. Thanks to new drilling in the Gulf of Mexico and the increased use of techniques like hydraulic fracturing, or “fracking,” on land, the U.S. is awash in crude.

Domestic oil production has increased every year since 2008, which has contributed to a growing world supply. Meanwhile, American refineries are buying fewer barrels of more expensive foreign crudes.

The increased oil supply in the U.S., combined with weakening expectations for the global economy and world oil consumption, will likely push oil prices lower in 2015. As the cost of oil falls, so will the price of petroleum products like gasoline.

One of the primary reasons your gas prices rise or fall is the fluctuation in the price of crude oil. U.S. refineries buy several million barrels of oil every day to supply the world’s biggest economy, so even small price changes make a big difference.

When crude oil prices go up or down, gas prices tend to follow. And right now, oil prices are on the decline.

Oil prices have been falling for several reasons, including the increased U.S. crude production and an outlook for weaker growth in global oil demand. Meanwhile, the Organization of the Petroleum Exporting Countries, or OPEC, decided toward the end of 2014 not to manipulate prices by restricting oil production.

Overall, government energy forecasters expect crude prices to be significantly lower in 2015. The Energy Information Administration says the U.S. benchmark price could drop to $62.75 per barrel in 2015 — a 33 percent discount from 2014. That means refineries would pay less for crude oil, and at least some of that savings should be passed on to drivers in the form of cheaper gasoline.

The Gulf of Mexico is home to some of the most promising oil fields in the world. It’s also especially vulnerable to hurricanes.

That makes the Gulf a rich and perilous place for satisfying America’s energy needs. But the region hasn’t seen much hurricane activity in a while, and that has contributed to declining gasoline prices.

A well-placed storm can cripple thousands of oil rigs in a weekend, and occasionally one does. Gas prices usually spike in reaction, as nervous refineries and petroleum traders gauge how long the supply disruption will last.

For example, in August 2012, gasoline prices surged as Hurricane Isaac whipped through the Gulf and shuttered 1.3 million barrels per day of refining capacity. In 2005, gas prices jumped more than 46 cents in the week after Hurricane Katrina made landfall, according to government data.

Mother Nature gave the Gulf a break in 2014. The National Oceanic and Atmospheric Administration says the Atlantic saw only eight named storms, including two major hurricanes, and none of them came near U.S. oil facilities in the Gulf of Mexico.

Did you know that there are many different recipes for gasoline? Thanks to different state and local regulations, your neighborhood pump probably sells a different blend of gas than pumps in other states. And there are seasonal varieties, too — summer gasoline and winter gasoline.

Winter gasoline is usually the cheapest.

Every September, the government starts to ease off clean-air standards for oil refineries, allowing them to make gasoline with cheaper hydrocarbons like butane. Refineries would love to benefit from the cost savings, but they usually don’t. Petroleum traders know they can buy gasoline at lower prices without hurting the refinery’s profits, and prices usually drop in response, says Tom Kloza, the chief oil analyst at GasBuddy.com.

Refineries usually begin making cheaper “winter-blend” gasoline between September and October every year. Americans will pump it into their tanks until spring.

 

Check out gas prices at GasBuddy