Pullback in oil kindles optimism
Since oil futures soared past $133 a barrel two weeks ago, crude has taken a hefty tumble during four trading sessions, including a $3.45 drop Tuesday to $124.31 a barrel, leading an increasing number of energy watchers to wonder whether the mania is easing.
And what does that mean for gasoline and the cost of future fill-ups?
“On the gasoline side, we’re pretty close to the peak in price,” said Phil Flynn, senior market analyst at Alaron Trading Corp. in Chicago. “Finally, a break for the poor consumers.”
Although consensus on oil matters is hard to come by in a market that has repeatedly defied expectations, Flynn and others believe the stunning rise in crude prices may be over for now -- barring hurricanes or other major disruptions.
“I think the main thing is a realization that the market’s probably run its course,” Flynn said. “The market just went up so much that we need to correct.”
The record-high closing cost that crude may hit May 21 was almost double the price paid a year ago -- a jump fueled in part by a weakening dollar and an influx of investors seeking better returns from oil and other commodities.
Surprised analysts and lawmakers have called the oil market run-up a speculative bubble that was not supported by supply and demand conditions.
Whatever the cause, consumers took the hit as surging oil prices pushed average gasoline prices nationwide to a new high of $3.978 a gallon Tuesday, stopping just shy of $4 a gallon for self-serve regular, according to AAA’s daily survey of pump prices.
Even if oil has stalled, gasoline prices probably won’t plunge, experts say. Drivers haven’t yet felt the full effect of oil’s latest surge, and pump prices usually decline more slowly than they increase.
James L. Williams, energy economist at London, Ark.-based WTRG Economics, believes that worldwide oil supplies are precariously balanced compared with rising demand. Still, he thinks crude prices should be near the $100-a-barrel mark.
Williams said he wasn’t sure whether the oil market’s recent dips were proof that the bubble had burst. But, Williams said, “I think that somebody’s pushing a pin in the side of the balloon.”
One force helping to tamp down oil prices is the economy. Sharply higher fuel prices have forced consumers to cut back, reducing fuel consumption, and triggered price surges for grocery items and anything else delivered to stores by train or truck. Those factors have loomed large in an economy already weakened by the nation’s housing crisis.
Another has been a slight rebound in the strength of the dollar. A series of interest rate cuts had devalued the dollar relative to other currencies, a strategy that sent investors into oil markets as an inflation hedge and pushed up oil prices because the commodity is traded in dollars. On Tuesday, the dollar strengthened after Federal Reserve Chairman Ben S. Bernanke said further interest rate cuts were unlikely.
Finally, there is growing pressure to rein in what critics have called excessive speculation in oil markets, including the shift to using less-regulated electronic trading markets, and the growing move of pension funds into commodities indexes. Congress on Tuesday held another in a string of hearings on the issue, and lawmakers have threatened to stiffen trading rules.
Stephen Schork, editor of a newsletter that tracks oil markets, said recent action in the crude markets “is giving all the telltale signs that the bubble has burst.”
He cited a recent spate of news that might have sent oil prices soaring, but didn’t: a large reduction in oil inventories last week and a series of better-than-expected economic reports. “Now this market seems to be ignoring that kind of bullish news,” he said.
“I like crude oil prices at between $90 and $100,” Schork said. But he warned that markets -- and especially oil markets -- often defied logic.
“Right now we’re at $125, and I think there is a 50-50 shot that we can go to $150 and beyond or we can go to $100 or lower,” Schork said. “And even though I think we should go down, this bull market has been extremely resilient, and at this point I’m not willing to bet against it.”
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