While the stock market continues to limp through its most turbulent time period in recent history, the price of crude oil has also gone through historic drops in price. As previously stated in the Zone, the price of heating oil tends to follow the price of crude closely, so the first step in understanding recent fluctuations in the price of heating oil is understanding the latest trends in the price of crude.
Source: The Financial Times (www.ft.com)
As the chart above illustrates, the last 10 days have brought a drop of more than $20 in the price of a barrel of crude oil on NYMEX . This huge decrease is primarily a product of the current economic crisis, which has intensified the last few months’ trend of decreasing oil demand in the US and abroad. “The prospect of a deep global recession and the negative demand implications for oil are causing the downward trend in prices to continue,” said Christopher Bellew, a senior broker at Bache Commodities Ltd. in London, as quoted on Bloomberg.com. Although reduced demand predictions through the end of the calendar year have been questioned by some market analysts, recent cuts in demand predictions by private firms and government organizations, including the International Energy Agency and Goldman Sachs, give support to expectations of lower demand into early 2009.
In addition to falling demand, increased supply has also contributed to lower crude prices in recent weeks. Wednesday’s announcement by the Energy Information Administration that crude oil stockpiles in the US are much higher than predicted (reported by Forbes.com) immediately drove prices down. The modest supply and production interruptions caused by hurricanes Gustav and Ike have been resolved by now, allowing supply levels in the Gulf of Mexico to return to normal.
Yesterday, OPEC convened an emergency meeting and afterward signaled that it would meet again in early November, and most likely cut production at that time in an attempt to buoy slipping prices. Quoted in a Financial Times article, oil consultant Olivier Jackob acknowledged that reduced worldwide demand is most influential force in the current market: “Be it in November or in December, be it formally or informally, Opec will need to reduce production - not because the price is currently too low but because there is not enough demand.” The fact that OPEC’s announcement had little to no effect on falling prices yesterday and today gives further weight to demand reduction being the most important cause of oil’s decline, as the Financial Times article confirms: “The drop suggested that the market was firmly focused on the impact of the financial crisis on global economic growth and energy demand next year, rather than on the cartel’s [OPEC's] action.”
The evidence seems to support the prediction that the downward trajectory of crude prices will continue through the rest of 2008, and perhaps into 2009. Wherever oil prices go in the future, we can be sure of one thing: that a recovering or further-deteriorating global economy will be the deciding factor.
