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Oil and Gas Prices Have Probably Peaked
05/03/2012 10:46 am EST
The political pressures that boosted crude to near 2008-level highs have lessened, so with demand down and supply up, it’s not surprising that markets are reversing course, writes MoneyShow’s Howard R. Gold, also of The Independent Agenda.
Remember just a few short weeks ago, when the media were speculating about how high gasoline prices could go?
I know—I wrote a story like that myself. (Read why Howard thought gasoline prices would remain high.)
In early March, gasoline prices hit $3.94 a gallon, and topped the magic $4 mark in California and other states. That was based on a jump in Brent crude oil prices to $128 a barrel.
Some of it was due to a growing US economy and some logistical issues. But the main reason was fear of either an Israeli air strike to destroy Iran’s nuclear facilities or Iranian military action to break sanctions from the international community.
Now, as negotiations with Iran have resumed and war talk has quieted, investors and speculators have realized how weak the fundamentals in the energy market are. Their response: sell. On Wednesday, Brent traded on the spot market just below $118 a barrel, an 8% drop from the peak.
That’s why Ben Brockwell, director of data, pricing, and information services at Oil Price Information Service, told me he thinks gasoline prices have likely peaked for the year. This year’s high was below last year’s top of $3.98, and “we’re now 12 cents a gallon cheaper than we were a year ago.”
On Wednesday, gasoline prices averaged just over $3.80 a gallon, according to AAA’s Daily Fuel Gauge Report. They were cheapest in the South and Midwest and priciest on the West Coast and in the Northeast. And prices could fall to $3.50 or lower if demand languishes, Brockwell said.
Even slightly lower gasoline prices would be a relief for an economy that lately has hit some bumps. That could be why the S&P 500 and the Dow Jones Transportation Average have both moved up from their early-April lows.
Here’s why I think oil and gas prices will head lower—with one important caveat.
First, there’s really no supply crunch. “Fundamentally, the psychology changed in April because we got less concerned about supply disruptions,” Brockwell said.
Right now, the oil market is well supplied. Saudi Arabia has pledged to boost production, if necessary, as it did last year when Libyan oil was off the market. And in March, President Obama and British Prime Minister David Cameron vowed to tap into their Strategic Petroleum Reserve if they needed to stabilize prices.
“They never did it, but just the threat of it had a calming influence on the market,” Brockwell said. That option will remain on the table if fear returns and prices surge again.
Meanwhile, gasoline demand in the US continues to be lackluster, he said. It’s off 6.6% from last year, a huge drop.
“People have adjusted” to higher gas prices, he said. They’re driving less, have more fuel-efficient vehicles, and use gasoline with more ethanol. Auto sales are robust, and car dealers say buyers are trading in their old clunkers for vehicles that get much better mileage.
All in all, that’s made US gasoline supply “plentiful,” in Brockwell’s words, as fuel stocks at the key storage hub of Cushing, Oklahoma exceed their five-year average. In fact, said Brockwell, the US has become a net exporter of gasoline, with over half of that going to Mexico.
So, can less demand and more supply drive prices up? Not in any economy I know of.
Of course, a lot of this depends on what happens in the Middle East. The price of crude comprises 72% of the price of gasoline.
And for the last few months, as Brockwell said, “the international crude oil market was in a state of fear” as Israeli leaders warned they might attack Iran to halt its nuclear program, while Iranian leaders threatened to cut off supplies if countries embargoed their oil.
- Read Howard’s outlook on the political road for the markets for the rest of 2012.
That “fear premium” may have been as high as $20 a barrel, and Brockwell estimates Brent crude was trading at a $20 to $22 a barrel premium to West Texas Intermediate. “I think some of that fear premium is out of the market,” he told me.
And more air may go out of the fear balloon if things remain relatively peaceful in the Gulf. Here’s what’s going on.
In March, Israeli President Benjamin Netanyahu visited Washington, and President Obama said the US would not tolerate Iran getting a nuclear weapon, bringing US policy much closer to Israel’s.
Just days before, Iran’s Supreme Leader, Ayatollah Khamenei—who had just won a power struggle over loudmouthed President Mahmoud Ahmadinejad—declared that “the Iranian nation has never pursued and will never pursue nuclear weapons,” whose possession he called “a grave sin.”
Whether you believe him or not—and count me as very skeptical—soon afterward, Iran agreed to talks with Western countries about resolving the nuclear issue.
Even tougher EU sanctions against importing Iranian crude start July 1. We’ll soon find out if the talks are a ploy or a delaying tactic, as they have been in the past…but for now the heat from that side is off.
It’s also cooling off in Israel. All winter, Prime Minister Netanyahu and Defense Minister Ehud Barak have warned that Iran’s nuclear facilities would soon enter a “zone of immunity” where they’d be invulnerable to an attack, and that time was running out.
But for the last few weeks, a parade of former top Israeli military and intelligence officials have publicly cautioned Netanyahu and Barak against attacking Iran prematurely, explicitly rejecting the timelines the two leaders laid out.
At a conference in New York last Sunday held by The Jerusalem Post, former Prime Minister Ehud Olmert said, “I think there is enough time to try different areas of pressure…without direct military intervention…”
And Gabi Ashkenazi, former chief of staff of the Israel Defense Forces, added: “I think we still have time. It’s not tomorrow morning.” Former domestic and foreign intelligence chiefs agreed. Even the current IDF chief of staff told an Israeli newspaper that Iran “hasn’t yet decided to go the extra mile.”
This is extraordinary. It’s as if President Clinton, the former and current chairmen of the Joint Chiefs of Staff, and the former heads of the FBI and CIA publicly urged President Bush and Defense Secretary Rumsfeld to wait before attacking Iraq in 2003. If only they had!
This means that, for now at least, the heat is off. We don’t know what will happen tomorrow, but I think talks would have to break down completely for Israel’s military option to be on the table again before the fall.
The stakes are high for the economy—and the president, whose approval ratings dipped when gas prices rose.
- Read about how Keynesians are leading a backlash against austerity at The Independent Agenda.
A study by the Milken Institute showed that for every $10 a barrel increase in oil prices, consumer spending declines by 0.4% and GDP drops by 0.2%. Conversely, declines in oil and gasoline prices are like tax cuts and can have a stimulative effect on the economy.
I realize that we’re dealing with probabilities and big uncertainties here. But it looks to me as if higher oil and gas prices won’t be a big worry when we head for the beach in a few weeks.
Howard R. Gold is editor at large for MoneyShow.com and a columnist at MarketWatch. Follow him on Twitter @howardrgold and catch his coverage of Friday’s jobs report and Sunday’s French election at www.independentagenda.com.
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