Oil's Slippery Slope
A warm winter drops prices-but not at the pump
In the Northeast, January has been warm enough to cause spring buds to burst forth, joggers to ease back to shorts and T-shirts, and the crude oil market to collapse.
The price per barrel on the New York Mercantile Exchange has fallen some 15 percent since the start of the year, dropping below $52 for the first time since mid-2005 and down by one third from last summer's peak. The market slid despite a slew of news events last week that, in normal times, would be seen as ill portents for global supply-an oil transit dispute between Russia and Belarus, kidnappings at Nigerian oil facilities, and proposed further nationalization of energy facilities by Venezuelan President Hugo Chávez.
"We've had a lot of stories this year that would have driven the market nuts-sharply higher-last year," says Phil Flynn of Alaron Trading in Chicago, who has typically been bullish in his forecasts. "This is obviously a significant event-closing below $55."
Plentiful. World events were overshadowed by last week's inventory data. They showed that stocks of distillate, which forms the basis of heating oil and diesel fuel, climbed by 5.4 million barrels-nearly triple analysts' estimates. The high stocks meant demand was at near-record lows, and the reasons were as apparent as the cherry blossoms in Brooklyn, N.Y. And there were no signs of oil traders looking at the price fall as a temporary drop and opportunity for bargain hunting.
"I think it's interesting that you don't see a lot of people rushing in to buy the price weakness," says Michael Lynch, president of Strategic Energy and Economic Research in Cambridge, Mass. "That tells you the psychology has changed." Lynch says the warm weather has hammered home what he has long argued-that global demand is weaker than speculators were counting on. "People are waking up to the fact that high prices-shockingly enough-cause conservation," says Lynch. "This is not just the weather."
Alas, for motorists, there was no quick relief at the pump. Flynn said it was typical of retail gasoline, where the price shoots "up like a rocket and falls down like feathers." AAA spokesman Geoff Sundstrom says that's because gas stations try to stay ahead of the curve when they see crude prices, and their own costs, rising. "But they have a completely contrary motive when the market is coming down-they want to sustain their profit margins as long as they can." And indeed, AAA's survey showed that the average price of regular gasoline had ticked down just 1.5 percent to $2.28-less than a 4-cent drop-since the January crude free fall began.
This story appears in the January 22, 2007 print edition of U.S. News & World Report.