It’s time to take a road trip or switch to a higher grade of gasoline or ignore “mpg” and lease an eight-cylinder car instead of a six-cylinder car. Seriously. In today’s gasoline market, any of those moves would be downright frugal.
In case you haven’t noticed, U.S. retail gasoline prices have fallen to a four-month low, in some cases to less than $3 per gallon. And they aren’t going back up for a while. So relax. Load up your car and hit the road. You’re rich!
Yes, that’s a bit of hyperbole, and it’s perfectly understandable if budget-conscious car drivers, whose memories of over-the-top gas prices are still fresh, avoid driving. But the fact is today’s cheap gas prices will be with us up for at least a few months. They may even keep falling.
Crude oil, which is what gasoline is made from, was trading Wednesday at a four-month low, slightly less than $95 per 42-gallon barrel for the U.S. benchmark West Texas Intermediate. As recently as Aug. 28, it was selling for $107.84. The simplest explanation for this is that the crude oil market is trending in concert with several widely traded commodities, whose prices have fallen recently as well.
Normally, prices for industrial metals and petroleum-based commodities -- where significant supply changes take years to emerge but demand can spike within weeks -- tend to move in the same direction, while prices for agricultural commodities -- where demand is relatively steady but significant supply changes can occur within weeks -- move in the same direction. Those two groups of prices do not normally mirror each other. However, current global economic woes and supply imbalances are affecting almost all commodities simultaneously.
“The weakness in precious metals, industrial metals and agricultural sectors has spread into the energy complex during the fourth quarter,” Deutsche Bank strategist Michael Lewis wrote earlier this week in a note. “Having been the only sector contributing positively to overall index returns in the first nine months of the year, energy returns are now down 0.6 percent year to date. We expect this weakness to continue responding to a moderation in geopolitical risk and signs that supply disruptions are moderating.”
Any immediate turnaround in commodity prices will depend to a considerable extent on what the Chinese do coming out of the Communist Party's Third Plenary Session, which ended Tuesday. It's not clear whether Beijing will do more to stimulate the world's second-largest economy. The meeting's final communique stated that the government would let the market play a "decisive" role in determing resource allocation.
"I don't think the plenum will result in measures that will stimulate the economy beyond the government's 7.5 percent GDP growth target for this year," Michal Meidan, senior analyst with London-based Eurasia Group, wrote in an email to International Business Times. "The government has consistently signaled throughout the year that it is wlling to tolerate slower growth in order to carry out structural economic reforms and that it is looking to shift to a more qualitative form of growth. Markets should learn to expect growth rates of around 7 percent from China, and slower oil demand growth relative to GDP, especially since the degradation in air quality has led to a more aggressive push to introduce higher fuel quality standards."
And if China's thirst for oil is slipping, the rest of the world is not about to pick up the slack. Global demand for OPEC and non-OPEC oil is contracting under the weight of Europe's moribund economy, the sluggish U.S. recovery and declining growth in the emerging markets. The International Energy Agency expects world demand for crude oil, both OPEC and non-OPEC, in the fourth quarter to creep up a paltry 0.7 percent. In the U.S. total demand for the current quarter will be up less than 1 percent. In a typical economic recovery the demand for crude oil would exceed the growth in GDP.
This demand weakness could send oil prices tumbling even further in the coming months, particularly since there is an abundance of supply. U.S. oil stockpiles are well above their five-year average for this time of year, a season in which stocks tend to be elevated anyway as refiners maximize heating oil production for the winter. But by early November the seasonal increase in crude oil supplies had exceeded comparable periods in each of the last two years: Crude oil inventories rose 1.6 million barrels for the week ended Nov. 1 to 385.4 million barrels, up 374.9 million barrels at the same time one year ago and up from 338.1 million barrels at the same time two years ago. In all, global supply is expected to rise 8.5 percent in the fourth quarter compared with the same period last year. Oddly enough, crude oil stocks have increased despite sharply higher refinery utilization rates.
Much of the additional supply comes courtesy of the lessening of tension in the Strait of Hormuz, which is located between Oman and Iran and is teh world's largest oil chokepoint. Concern that thsi passageway may be blocked in the near future has dissipated as negotiations between the Iranian government and the West over Iran's nuclear program have made some progress; as a result, in recent months Iran has backed off of its threats to close off the Strait in recent months. And similarly, the Horn of Africa, an oil channel where dangerous players like Yemen, Somalia and high seas pirates reside, has been relatively quiet lately. As other geopolitical issues wane, oil supplies should increase even more.
“We expect a great deal of conventional oil which is currently being constrained by war, mismanagement or sanctions to come back to the market," Julian Jessop of London-based Capital Economics wrote last week. "In particular, a resolution of the standoff in Libya and a possible relaxation of sanctions on Iran could by themselves add over 2 million barrels per day to global supplies.” Jessup predicted that the price of crude oil will fall to $90 by 2015.
So with the stars perfectly aligned in the skies over the oil patch, oil and gas prices have nowhere to go but down. That should make the AAA happy -- not to mention all the proverbial grandmas who live a long drive away, a trip taht is suddenly within budget this Thanksgiving.