Demand drop fuels historic crude oil price decline

by Ron Sterk
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KANSAS CITY — The precipitous drop of nearly 65% in crude oil futures prices since early July has been as jarring as the run-up in prices to record highs, but it also has left the impression that volatility in the oil market may be here for the foreseeable future with demand as a principle swing factor.

"It’s all about demand," said Amanda Kurzendoerfer, commodity analyst with Summit Energy, Louisville, Ky. "Demand in the United States is the weakest it has been since 1980."

Businesses and consumers alike welcomed the break in diesel fuel and gasoline prices as crude oil futures plunged more than $95 a barrel from the July 11 record high of $147.27 to below $50 last week.

U.S. average retail diesel prices droppedbelow $3 a gallon the week of Nov. 10 for the first time since September 2007, according to the Energy Information Administration (E.I.A.). With a national average of $2.81 a gallon last week, diesel prices were down $1.95, or 41%, from the record high of $4.76 the week of July 14. Average regular grade gasoline prices were $2.07 a gallon on Nov. 17, down $2.04, or 50%, from a July high of $4.11.

With crude oil prices rising nearly 70% from January to July and then declining nearly 65% from July to November, the question is: where will crude oil, and subsequently diesel fuel and gasoline prices, go from here?

In its Nov. 12 Short-Term Energy Outlook, the E.I.A. sharply ratcheted down its forecasts for crude oil, gasoline and diesel fuel prices for 2008 and 2009.

"The current U.S. and global economic downturn has led to a decrease in global energy demand and a rapid and substantial reduction in crude oil and other energy prices," the E.I.A. said. "Further deterioration in actual or expected global economic growth as a fallout of the current financial crisis may lead to even lower oil prices."

"Crude oil demand is down with the global economy," said Tim Statts, director of risk management and vice-president, Summit Energy, during a Sosland Publishing Seminar Markets Update Webinar Nov. 12. He noted a cut in crude oil production had little impact on prices because "we’re in a demand-driven market in oil right now." The Organization of Petroleum Exporting Countries (OPEC) reduced crude oil output by 1.5 million barrels a day as of Nov. 1.

The E.I.A. forecast West Texas Intermediate crude oil prices to average $101.45 a barrel in 2008 and $63.50 in 2009, down from its October forecast of $112 for both years and compared with $72.32 in 2007.

Ms. Kurzendoerfer said she expects crude oil prices in the "$50s and $60s through 2009."

Mr. Statts said he "would not be surprised" to see crude oil prices move up to $70 a barrel and then drop to $40.

"The lows are still not in," he said. He also predicted volatility would continue.

Retail diesel prices were forecast by the E.I.A. to average $3.81 in 2008, down from $4.01 forecast in October and compared with $2.88 in 2007 and $2.73 forecast for 2009. Average regular gasoline prices were forecast at $3.29 this year and $2.37 next year compared with $3.56 forecast for both years in October and with $2.81 last year.

Consumption of all petroleum products in the United States in 2008 is projected by the E.I.A. to average 19.6 million barrels a day, down 1.1 million barrels a day, or 5.4%, from 2007.

"This marks the first time since 1980 that annual total petroleum consumption is expected to decline by more than one million barrels a day," the E.I.A. said.

Mr. Statts noted the difference between 1979-80 and now is that the earlier drop in crude oil use was supply driven and the current decline is demand driven.

U.S. crude oil production in 2008 is projected at 4.9 million barrels a day, down 120,000 barrels a day from 2007, primarily due to losses caused by hurricanes Ike and Gustav, the E.I.A. said.

"Domestic crude oil production has been steadily declining since the 1970s, and the 2008 projection for crude oil production falls below five million barrels a day for the first time since 1946," the E.I.A. said. But the agency forecast a rebound in 2009 U.S. crude production to 5.3 million barrels a day as two new platforms come into production.

Ms. Kurzendoerfer noted the sharp drop in crude oil prices along with the tight credit situation globally has prompted the cancellation of some crude oil drilling projects, which could affect supply longer term and result in supply "barely meeting" demand as had been the case just a few months ago. New sources must be brought on line regularly because global crude oil production from maturing fields naturally declines 6% a year, she said.

"Future price levels will primarily depend on the magnitude and duration of the economic downturn as well as OPEC and non-OPEC behavior," the E.I.A. said.

"OPEC is behind the curve," Ms. Kurzendoerfer said. A cut in production by OPEC takes time to filter through to the end user and might not make an impact on prices until later in 2009, she said.

An OPEC meeting scheduled for Nov. 29 originally for Middle East members only has been expanded to include all members because of the sharp downturn in crude oil prices. All OPEC members originally were set to meet Dec. 17.

This article can also be found in the digital edition of Food Business News, November 25, 2008, starting on Page 1. Click here to search that archive.

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