Crude Oil Drops to Near $50 a Barrel

Oil prices fell Wednesday to their lowest level in nearly two months and were poised to slip below $50 a barrel, a pullback that could spell relief for motorists facing sticker shock at the pump.

Two weeks after the markets buzzed with talk of oil reaching $60 a barrel -- or higher -- prices reversed course in response to data showing rising supplies and slowing demand worldwide.

With crude prices now dropping, “retail gasoline prices could decline soon,” Jacques Rousseau, an analyst with the investment firm Friedman Billings Ramsey & Co., said in a note to clients.

U.S. light crude oil futures for May delivery fell $1.64 to $50.22 a barrel on the New York Mercantile Exchange. The last time oil closed below $50 was on Feb. 18, when it finished at $48.35.

The price has now skidded 12.3% since hitting an exchange-record closing high of $57.27 on April 1. Three days later, oil traded at an intraday high of $58.28 before closing lower. Adjusted for inflation, though, crude prices remain well below record highs reached in the early 1980s.

Oil came under additional pressure Wednesday when the Energy Department said U.S. oil supplies edged up 3.6 million barrels, or 1.1%, to 320.7 million in the week that ended Friday.

It was the ninth straight weekly buildup of oil inventories, which now stand at their highest level since June 28, 2002, the agency said. The gains partly reflect a decision last month by the Organization of the Petroleum Exporting Countries to boost production.

But the report that really stung the market came Tuesday, when the Paris-based International Energy Agency made a slight downward revision in its forecast of world oil demand this year, said John Kilduff, senior vice president at the commodities trading firm Fimat USA Inc. in New York.

“That was huge because the run-up [in prices] we had seen was almost completely predicated on spectacular demand fears,” especially in the United States and China, he said.

The demand for oil by China is expected to grow 7.9% this year, but “fears of a surge in second-quarter Chinese demand are receding,” said the IEA, which advises industrialized nations on energy matters.

The agency trimmed its estimate for total global oil demand this year to 84.27 million barrels a day, a drop of 50,000 barrels from its previous forecast. The IEA last month had raised its demand forecast for 2005 by 330,000 barrels a day.

U.S. motorists may finally see pump prices start to move lower now that crude oil -- which accounts for about half of gasoline’s cost -- is coming down.

The average price of self-serve regular in California stood at a record-high $2.638 a gallon Wednesday, according to the AAA. The nationwide average was $2.264, just below the record $2.276 reached Monday.

U.S. gasoline inventories also are improving: Supplies edged up 800,000 barrels to 213.1 million in the week ended Friday, the Energy Information Administration, the Energy Department’s statistics arm, said in its weekly report.

The May contract for gasoline futures fell 4.95 cents to settle at $1.4843 a gallon on the Nymex on Wednesday. The contract has dropped 26.5 cents, or 15%, since hitting a record $1.7491 on April 4.

Analysts cautioned that the downward spiral in prices could quickly stall, and that prices could move back up just as they have several times over the last 18 months.

Regardless of recent data, global oil supplies remain tight compared with growing demand, and that is keeping upward pressure on prices, experts said.

Indeed, the EIA said it “does not foresee a sustained crude oil price below $50 per barrel in the near future.”

The agency said in its weekly report that there remained “very little spare production capacity available” to meet demand, and that any real or perceived threat to global oil output -- such as terrorism or political instability in oil-rich nations -- could suddenly lift prices.

OPEC, which supplies more than a third of the world’s oil, clearly is benefiting from the high prices. But the cartel also is worried that energy costs will damage its customers’ economies to the point that long-term oil demand and prices fall sharply.

On Wall Street, investors in recent weeks have appeared more doubtful that crude prices would continue to climb. The so-called XOI index of 13 big-name oil stocks peaked on March 4 and is down 6.7% since then.