Israeli tanks near the Gaza border Image: New York Times/AP/Sebastian Scheiner

Over the last few months, economic factors have caused changes in oil prices, with few exceptions.  Yesterday’s Israeli air strikes on Hamas infrastructure in the Gaza strip showed how geopolitical events can also have profound effects on the world oil market; oil prices jumped this morning as Israel continued its assault on Gaza’s ruling faction.  The military action stoked fears that instability in the Middle East could lead to oil supply disruptions–but fears of long-term supply problems are largely unfounded, according to an Associated Press article:

“There could be fear that an escalating Middle East conflict could disrupt supplies, though I don’t see that happening at this point,” said Gerard Rigby, energy analyst with Fuel First Consulting in Sydney. “(Israel-Palestinian conflict) always causes a bit of a blip and is one component that could support prices short-term.”

A declining dollar, depressed by consistently negative US economic news, also helped to lift oil prices, as cheap U.S. currency made the commodity a more attractive investment.  China also announced plans to increase its crude oil stockpiles while prices are low, maintaining brisk imports from OPEC members (primarily Saudi Arabia).  OPEC member United Arab Emirates also helped support prices by announcing production cuts in line with OPEC targets set at its meeting in Algeria earlier this month.

As of 9:58 am eastern time, the price for a barrel of crude had retreated from an early peak of $42, but still stood more than a dollar up on the day at $38.79.  Heating oil followed a similar path, up 3% over Friday’s closing price.

HEAT USA price experts reported a 4¢ increase in the price of heating oil over Friday’s price early this morning, as well as a 6¢ increase effective at 10 am as a result of the spike in market prices.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: UP $0.10
Morning Projection (for Tuesday’s average price per gallon): DOWN $0.01

The failure of OPEC’s 2.2 million bpd production cut was further emphasized this morning, as oil prices sunk to new lows.  The price for a barrel of crude rested at $37.90 and the price for a gallon of heating oil had lost a penny as of 9:49 am eastern time.  News of China’s intention to cut domestic fuel prices in an attempt to stimulate demand fueled a slight recovery early this morning, but it was quickly erased.

OPEC’s production cut is widely viewed as insufficient to pull up oil prices, especially considering the cartel’s history of not fully complying with its own production targets.  As Edward Meir of MF Global stated in an CNBC article, “The verdict was a resounding vote of no-confidence in the (OPEC) cartel’s ability to curtail production given its previous tendencies to backslide on commitments.”

HEAT USA price experts confirmed a small decrease in retail prices this morning, and looked forward to another slight decrease tomorrow.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: DOWN $0.02
Morning projection (for Friday’s average price per gallon): DOWN $0.02

Crude and heating oil prices jumped up this morning, effectively erasing yesterday’s price drops. As of 10:03 am eastern time, crude was up 5% to $44.16 a barrel and heating oil was 3% above its Monday closing price. A Bloomberg article cited near-certain production cuts to come out of OPEC’s December 17th meeting and Russia’s plans to make a coordinated production cut as the main reasons for today’s optimism on the oil market. Industry analysts surveyed by Bloomberg expect a 1.3 million barrel increase in crude stocks to be announced by the EIA this morning, but also predicted a significant decrease in gasoline and distillate stocks.

CNBC.com reported that U.S. gasoline demand in November increased 0.3% over November 2007 levels, leading Petromatrix analyst Olivier Jakob to comment, “We can’t really talk about ‘demand destruction’ in the U.S. anymore.”

Good news appeared to outweigh bad this morning, as expectations of increasing crude stocks in the U.S. and falling crude imports in China failed to drag down prices.

HEAT USA price experts confirmed an expected moderate drop in retail heating oil prices for today, but predicted a similar margin of increase in tomorrow’s prices.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: DOWN $0.05
Morning projection (for Thursday’s average price per gallon): UP $0.06

The HEAT Zone has, in the last six weeks or so, taken the position that the only reliable prediction for oil prices in 2009 is  unpredictability.  A major global recession, plummeting demand for oil and oil products, and unstable regimes in oil-producing nations are just a few of the factors make the price of oil over the next year as unpredictable as the weather.

Nevertheless, there are legions of well-educated, well-paid analysts out there whose job it is to make predictions, and, despite the volatile times, continue to do their jobs.  These extraordinary times make for incredibly wide range of predictions, which just this week included guesses of crude oil reaching as low as $25 or as high as $60 a barrel next year.  Analysts at Merril Lynch cited the global recession reaching China (the world’s fastest-growing oil consumer) as the root cause of crude prices temporarily falling below $25 a barrel next year, according to an article on Bloomberg.com.

On the same say as the Merril Lynch announcement (December 4th), Forbes.com published an Associated Press article which covered other analysts’ projections for “a bump in oil prices for 2009.”  The article quoted analysts from Raymond James Equity Research and Credit Suisse who predicted a (modest) recovery in oil prices next year.  The analysts cited future production cuts and last week’s surprising news of stockpile decreases in the U.S. as reasons to expect a recovery in crude oil prices.

It is almost certain that recovery from the current global recession will restore worldwide oil demand and thus bring up oil prices.  When that will happen is the question that no one can answer.  Crude prices will most likely between $25 and $60 a barrel in 2009.  Any predictions that get more specific than that should be regarded with skepticism.  The truth is, the current economic situation is completely unprecedented, so people who say they know what will happen next probably have a separate agenda.  Or they could just be doing their jobs.

This morning’s news of China’s large interest rate cut continued to inspire optimism throughout the trading day today, leading crude and heating oil to 8% and 4% price gains, respectively.  The long-term prospect of China’s rate cut stimulating economic growth and oil demand outweighed news of huge inventory increases in U.S. stockpiles of crude oil, gasoline, and distillates (which includes heating oil).  Russia’s intention to cooperate with OPEC to lower prices with the possibility of cutting its own production also helped to boost oil prices on NYMEX today.

HEAT USA price experts confirmed this morning’s projection for a moderate retail price increase, and noted that, due to the Thanksgiving holiday, end-of-day prices will apply to Thursday and Friday of this week.

HEAT USA Price Report
Evening Projection (for Thursday’s/Friday’s average price per gallon): UP $0.04

Oil prices are climbing this morning, stimulated by the Chinese government’s fourth interest rate cut in the last ten weeks–an attempt to re-ignite economic growth in the country.  Crude and heating oil were both up 2% as of 9:45 am eastern time.

Analysts believe the interest cuts could stimulate fuel demand in China, the world’s fastest-growing economy.  From Bloomberg.com:

“The combined fiscal and now monetary push will help to avoid a hard landing in China, and thus remains supportive of its oil-demand growth,” said Harry Tchilinguirian, senior oil analyst at BNP Paribas SA in London.

Russia also did its part to drive oil prices up, announcing that it will cooperate with OPEC in the near future in efforts to boost falling prices.  The announcement did not specify the nature of Russian cooperation, but a production cut is a definite possibility.  From Bloomberg.com:

“Russia is being more cooperative like they were about 10 years ago and it would be bullish if they cut output along with OPEC,” said Anthony Nunan, assistant general manager for risk management at Mitsubishi Corp. in Tokyo. “It’s already expected OPEC will cut, but the unknown is the depth of it.”

HEAT USA price experts confirmed a sizable decrease in retail heating oil prices today, and noted that, despite this morning’s price gains, a forthcoming report on U.S. petroleum stockpiles could drive prices down later today.

HEAT USA Price Report
Today’s average retail heating oil price per gallon: DOWN $0.07 to $0.08
Morning projection (for Thursday’s/Friday’s price per gallon): UP $0.04 to $0.05

Not even pirates hijacking oil tankers could rescue falling oil prices today, after news of an official recession in Japan and reports of big demand reductions from China’s biggest oil company drove the price of crude to a 21-month low of $54.95 a barrel.  The price of heating oil dropped less sharply, losing 2% to settle at $1.79 a gallon.

HEAT USA price experts were pleased to see the upward trends of the morning reversed, and expect a drop in tomorrow’s retail prices similar to the decline seen this morning.

HEAT USA Price Report
Evening projection (for Tuesday’s average price per gallon): DOWN $0.04

Crude and heating oil prices dropped like stones this morning, reflecting intensifying concerns about the worldwide economic slowdown and its effects on energy demand.  Both crude and heating oil were down about 2.6% as of 9:54 am eastern time, at $57.77 a barrel and $1.88 a gallon, respectively.  Recent reports that China’s oil imports declined slightly last month stoked investor nervousness about oil.  A strengthening dollar also contributed to lower prices for oil and other commodities.

HEAT USA price experts confirmed a moderate drop in retail prices this morning, and expect a similar drop, based on the morning’s market performance, in tomorrow’s prices.

HEAT USA Price Report
Today’s average heating oil price per gallon: DOWN $0.07
Morning projection (for Thursday’s average price per gallon): DOWN $0.05

The price for a barrel of crude oil dipped below $60 and heating oil dropped below the $2 per gallon mark this morning.  Skepticism of China’s recently-announced economic stimulus plan’s effectiveness at stimulating oil demand as well as expectations of the IEA cutting its oil demand forecast for the third straight month led to market pessimism.  A strengthening dollar and falling stock market also contributed to lower oil prices.

HEAT USA price experts confirmed an expected small uptick in today’s retail prices and predicted a moderate decline in prices for tomorrow.

HEAT USA Price Report
Today’s average heating oil price per gallon: UP $0.03
Morning Projection (for Wednesday’s average price per gallon): DOWN $0.05

Image: AP/Wall Street Journal

Although oil prices surged today, the $70 per barrel price is nearly 25% lower than this time last year and 50% lower than the peak of $147 reached in July.  This morning, investment bank Credit Suisse made the case that oil prices will continue to drop for months to come.  Th bank revised its oil price prediction for the second time this month, reducing its 2009 prediction to $60 a barrel (from $70) and 2010 prediction to $80 a barrel.  Bank researchers cited the effects a global recession will soon have on China, the world’s second-largest oil consumer after the United States, as the main cause of their reduced price projections.

As an article in the Wall Street Journal reported, Credit Suisse forecast 7% economic growth for the next three quarters in China, a substantial reduction for the world’s fastest-growing economy, which has enjoyed double-digit growth of its gross domestic product (GDP) since 2002.  If Credit Suisse’s prediction plays out, China’s GDP growth will fall below the 8% mark that the Chinese government has stated as necessary to accommodate the massive rural-to-urban demographic shift that is underway in that country (source: Guardian UK).  Resulting problems would only further disrupt China’s humming manufacturing sector, which has already shown signs of slowing down in response to decreased demand for consumer products in the US and around the world.

As China has risen to take its place as a dominant economic force in the global economy during the first decade of the 21st Century, it is no surprise that it is poised to be hit hardest by economic crises from other parts of the world.  Sparked by a global recession, a slowdown in China’s production apparatus would lead to reduced demand for oil and keep oil prices low.  And that is how a factory in Beijing shutting down could lead to you paying lower prices for gasoline and heating oil.

The Energy Information Administration (EIA), the statistical branch of the Department of Energy, released its Short-Term Energy and Winter Fuels Outlook report today.  The report was covered by many news organizations, including the Associated Press and the Wall Street Journal.  News agencies seized upon the harsh declarations in the report, particularly that “Average household expenditures for all space-heating fuels are projected to be $1,137 this winter (October 1 to March 31), a 15-percent increase over the estimated $986 spent last winter.”

Price experts and market watchers at HEAT USA found the report to be well-intentioned but misleading. “Unless you’ve been asleep for 12 months, you know energy prices have gone through the roof. What this report makes no mention of is that energy prices are significantly off their highs from the summer, and from the middle of last winter,” says Andrew Heaney, President of HEAT USA. “The good news is that EIA is finally doing their job–they are trying to prepare the American people for the worst.  But the truth is, in terms of heating costs, there’s strong evidence that suggests the worst is already behind us.”  Perhaps the strongest evidence that Mr. Heaney refers to is the trajectory of crude oil prices since this summer.

After reaching its all-time high of $147 in July, the market price for a barrel of crude oil has fallen consistently and hit an eight-month low of $89.75 on Monday.  Heating oil rose to record-high prices in July as well, causing panic in communities across the Northeast that led to some rash buying decisions (see the September 26th posting: “The Perils of Locking in Your Heating Oil Price”).  With the current economic crisis expanding beyond the US and into European and Asian markets, the outlook for the next few financial quarters, and perhaps the next few years, includes a potential steep decline in energy demand.  “With the world facing what could be the worst economic environment since the 1930s, with consumers everywhere cutting back on spending in every area from cars to electronics, how could manufacturing centers like China and India continue to increase their demand for oil at the rate they did over the last few years? They can’t and they won’t,” Heaney said.

Domestic energy demand in the US has been dwindling for months, and continues to decrease as the economy slows down.  Besides the moderate supply disruptions caused by hurricanes Gustav and Ike, this decline in energy demand remains the most influential factor on the price of oil in the current market.  In fact, slacking demand has led many industry experts to revise their ’sky-is-the-limit’ predictions for next year’s oil prices- most notably Arjun Murti of Goldman Sachs, who on September 19th cut back his 2009 price prediction from $140 a barrel to $110, according to the Economic Times.  Murti further acknowledged demand reduction patterns in the oil market as recently as last weekend, as reported by Rueters yesterday: “Oil prices increasingly appear unlikely to sustain a rally until global GDP expectations bottom,” he wrote on October 5th.  Translation: as the global economy declines, worldwide demand for oil will continue to shrink.  As demand lessens, crude prices will most likely continue to go down, taking heating oil prices with them.

To be sure, no expert analyst or government agency can actually predict where the price of oil will go in the next weeks, months, or years.  One would expect an already-unpopular president and Congress to be conservative in their estimates of coming difficulties for Americans, as any underestimation on the part of the government to become yet another example of their ineptitude in responding to a major crisis.  Average Americans will no doubt face substantial economic hardships as the current crisis intensifies.  By joining HEAT USA you’ve taken one of the most important steps to protect yourself–you’re better protected and informed than other heating oil consumers. And we’ll continue to work hard to keep you that way.