Gas prices likely to make a U-turn

By Thomas V. Bona

BusinessRockford.com

How far will gas prices fall?

They could drop a few cents below where they are now, the U.S. Energy Information Administration said Tuesday, and not return to $4 a gallon in the foreseeable future.

Galena-based analyst Jim Ritterbusch said crude oil could fall as low as $100 a barrel, sending gas prices in Rockford down to $3.30 in the next six weeks.

And Tom Kloza, chief analyst for the Oil Price Information Service, said prices could fall even further.

“We’ve just embarked on a depressive phase that may ultimately result in $80- to $100-a-barrel crude that will inevitably be followed by another manic phase that would bring back $130-plus,” Kloza said. “Ditto for gasoline, which could be worth anywhere from $2.95 to $4.35 a gallon in the next 15 months or so.”

Why the range of predictions? Analysts aren’t sure what’s going on in a market that has been particularly volatile.

They agree that oil prices are dropping because of decreased demand, increased production and the recent rebound of the value of the U.S. dollar.

The EIA’s projection, released in its monthly energy outlook, is the first optimistic forecast in months.

In July, the agency predicted that gas prices could stay “well above” $4 a gallon for the rest of the year and not drop below until fall 2009.

But crude oil prices fell from $145 a barrel on July 3 to about $113 a barrel today. Gas prices have dropped about 30 cents nationally and locally in the past month, according to AAA’s fuelgaugereport.com.

“Downward price pressures would increase if the economic slowdown proves deeper or longer than expected, and if higher prices lead to lower consumption and lower demand for OPEC crude than currently anticipated,” the EIA report said.

But there’s the chance that the drop in oil prices could be short-lived, the report said. For the drop to maintain or even continue, global consumption needs to stay down and oil-producing countries have to keep supply up.

“Supply risks in Iraq, Nigeria and Iran, as well as threats of hurricanes over the near term, continue to influence market expectations,” the report said. “In addition, OPEC production behavior that would lead to voluntary production cuts aimed at keeping inventories fairly tight would also limit downward price pressure.”

Ritterbusch said the EIA is pretty conservative in its projections, usually mirroring trends rather than stepping out on its own.

He said the oil market has changed drastically with decreased demand, and large hedge funds and other investors are looking to sell off their oil contracts rather than buy.

In the first half of the year, news about the Russian military actions in Georgia or the disruption of a pipeline in Turkey would have sent oil prices soaring. Now, they just keep dropping by about $1.50 each day.

Kloza agreed that the EIA’s forecast is too conservative, and U.S. demand has dropped more than many realize.

The relief could last for a while, but not forever.

“Longer term, say from 2010 on, it’s hard not to believe that we won’t have several other fossil fuel crises on our hands,” he said. “China will be a major customer. It’s just that the investment community wrongly assumed that a large portion of the 1.3 billion Chinese population would immediately move into middle class status and use fuel with impunity.”

Gas prices haven’t fallen as fast as oil prices, but they also didn’t rise as fast in the first place.
Crude oil has dropped almost $32, or 22 percent, since its high-water mark of $145 on July 3. Gas prices have dropped almost 35 cents (8.2 percent) in the Rockford metro area from their high mark of $4.20 a gallon on July 16.

But the price of oil is still 63 percent higher than it was a year ago, while the cost of gas is up 37 percent locally.

When gas prices rose above $4, retailers had little to no profit margins, said Bill Fleischli, executive vice president of the Illinois Petroleum Marketers Association/Illinois Association of Convenience Stores. Now they’re seeing more profit, but not as much as they did before the run-up in oil prices.

Also, there sometimes is a lag between a drop in oil prices and a drop in wholesale petroleum prices, which are the prices retailers pay for their products.

Fleischli said competition will force prices down as retailers want to bring customers back to the pump.

“Oil is still very, very high, but demand is off,” Fleischli said. “If we don’t have any horrible weather, this is at least a start.”

Contact staff writer Thomas V. Bona at 815-987-1343 or tbona@rrstar.com.