Crude Dynamics - Oil Prices Begin an Overdue Correction

            Crude oil prices seem to be correcting from inflated highs as oil has dropped over $4.00 dollars a barrel today and have settled under $100. Thankfully the laws of supply and demand have finally gained some traction restoring a little order to the volatile oil prices of Q1 and Q2 2011. If these reductions hold the price of gasoline should decline by June and the financial burden placed on American motorists should be eased a bit helping the economy and discretionary income levels. 

Many have blamed speculation by investment banks for the recent volatility and ultimately for artificially inflating the price of oil. Others theorists have indicated that the recent spike is just part of a longer trend upwards which can’t be avoided as we begin to approach peak oil production across the world.  Both send ominous messages to the American consumer and the truth is that both factors are at work here in one degree or the other. But one of the two, speculatory inflation has the more sinister undertone of greed and profiteering in a time when our economy can least afford it.

             

             So what did it really take to drive down the price of crude and does this indicate that speculation was the culprit behind oil and gas prices?

            Well over the past two weeks we have seen:

• A 25% increase in the margin requirement on oil by the CME. Last week the CME raised margin requirements for silver and that commodity has lost about $20 per ounce over the last week.

• EIA reports that have indicated a steady increase in crude oil stocks (3.8 mbbl over the past week alone and 7.8 mbbl for the year) as well as a steady hold in gasoline consumption by American motorists despite the start of the summer driving season.

• A weakening of the Euro against the Dollar amid inflation problems in various E.U. nations and continued financial problems with Greece, Portugal and Spain.

• A cooling of the Chinese economy where inflationary control measures have tightened up money.

• An increase in unemployment filings indicating a slowing of the recovery and ultimately less commuters on the road.

The only mitigating factor in all of this is flooding around the Mississippi delta that may interrupt refinery operations in those areas.

Ironically any one of these events would have been enough in the past to drop oil prices slightly and the combination should be enough to drive the price back to 2010 levels.  However we still have seen only a $15 drop in crude per barrel which hasn’t translated into any real reductions at the pump. In Q2 of 2010 the price of gasoline was 2.81 per gallon while gasoline consumption was at 9.201 mbbl/d. In Q2 2011 gas prices are at 3.85 per gallon while consumption sits at 9.219 mbbl/d.

This seems to indicate that while Supply and Demand dynamics are taking effect speculation and fear of peak oil are still keeping the price artificially high. In the eyes of many recent efforts to rein speculation don’t seem to have gone far enough and the government should further regulate the oil futures market.

       With supplies of crude remaining steady and gasoline consumption flat lined we should be poised for a further drop in the price of oil and ultimately gasoline at the pump. However it is clear now that speculation is still keeping the price higher than it should be. After all it only took a war in Libya (Only about 2% of Libyan oil reaches U.S. shores) to drive the price up $40.00 per barrel why shouldn’t the 5 factors above drive the price back down?