In a move that could lead to lower gasoline prices, crude oil closed below $50 a barrel for the first time in more than two months yesterday after declining by more than $5 a barrel in the past week on rising U.S. supplies and slower economic growth.
Light sweet crude for June delivery fell $2.05 to settle at $49.72 a barrel on the New York Mercantile Exchange, where prices fell as low as $49.10 yesterday. It was the lowest settlement price since Feb. 18, when NYMEX oil futures closed at $48.35.
Oil broker Thomas Bentz of BNP Paribas Futures said that from a technical trading perspective the oil market right now is "pretty much as bearish as you can get. It portends lower prices next week."
Bentz was still leery of declaring the end of high oil prices, however, saying that another move above $50 a barrel would hardly come as a surprise, given tight supplies and market jitters about even the slightest output disruption. That said, in the near term prices could drop below $48 a barrel as early as next week, he said.
Also yesterday, the government reported that Americans' incomes rose by 0.5 percent in March, the best showing in three months. Consumer spending rose by 0.6 percent.
The Commerce Department said the March income gain followed a 0.4 percent rise in February and was the best since a 3.7 percent surge in December, a month when the income figure soared because of a special dividend payment made by computer software giant Microsoft.
The 0.6 percent increase in consumer spending was down only slightly from a 0.7 percent gain in February and no increase at all in January. Both the rise in incomes and spending came in better than economists had expected, bucking a recent trend in which other March statistics showed economic activity slowing significantly.
When inflation was taken into account, spending in March rose a more modest 0.1 percent after a 0.4 percent increase in February. That sharp difference was explained in part by the fact that energy prices surged during the month, forcing consumers to spend more at the gasoline pump and leaving them with less to spend elsewhere.
While incomes were up 0.5 percent, disposable incomes, the amount left after paying taxes, also showed a 0.5 percent gain in March. However, that increase was wiped out when inflation was taken into account to show no gain in inflation-adjusted disposable incomes in March after a small 0.1 percent increase in February.
Personal savings, represented as a percentage of disposable income, dropped to 0.4 percent in March, the lowest level for savings since a negative 0.2 percent savings rate in October 2001.
In another report, the Labor Department said that Americans' wages and job benefits rose by just 0.7 percent in the first three months of this year, after an increase of 0.8 percent in the fourth quarter of 2004. The 0.7 percent increase in the Employment Cost Index represented the smallest rise for wages and benefits in six years and was likely to ease concerns that inflation pressures are mounting.
Declining oil and gasoline prices may do the same thing. Wholesale gasoline futures fell by 5.6 cents yesterday, to settle at $1.49 per gallon on NYMEX. Still, pump prices average more than $2.20 a gallon nationwide and the peak demand period is right around the corner.
In the past week, oil prices have been on a downward trend due to a spate of bearish news, the most recent being the Commerce Department's announcement that the economy grew at a slower-than-expected rate of 3.1 percent in the first quarter.
On Wednesday, the Energy Department said inventories of crude oil grew by 5.5 million barrels in the previous week to 324.4 million barrels, or 9 percent above year-ago levels. That's the 10th time supplies have risen in 11 weeks.
President Bush has signaled that he would act to reduce crude prices, first when he called on Saudi Arabia's Crown Prince Abdullah on Monday to expand production, and on Wednesday when he urged using closed military bases as sites for new oil refineries.
But while oil futures have fallen from their recent peak above $58 a barrel, prices remain more than 30 percent higher than a year ago.
Strong global demand, especially from China, concerns about limited excess production capacity and fears of unplanned supply disruptions have kept prices high in recent years.
Economists don't believe the surge in energy prices this year will be enough to push the country into a recession, but they expect the country to have to endure a "soft patch."