There are signs of price stabilization in the oil market. And, as is often the case with crude, if price stability occurs in the year ahead, it will be due to a confluence of factors including the fact there are fewer Americans getting into cars as a result of the recession.Oil traded Monday up 20 cents to $78.20 per barrel, nearly half the all-time high of more than $147 before the credit bubble burst.
Oil: The Price Stability Argument
If oil prices do stabilize in 2010, sluggish demand in the United States will undoubtedly have played an important role. Increases in Asian demand in 2010, particularly in rapidly-growing emerging market countries such as China and India, has already been factored into oil's price.
The demand wild card remains the United States, and so far, there's little sign of a return by the U.S. to the gas-guzzling ways of the previous decade. The loss of more than 7.6 million jobs in the 2007 to 2009 recession has taken millions of drivers off U.S. roads. Belt tightening by remaining drivers due to high gasoline prices and pinched family budgets has lead to further conservation, with Americans increasingly looking for more-fuel-efficient vehicles for their next purchase.
The result? A decline in year-over-year in U.S. oil consumption -- down 4% in 2009 to 18.7 million barrels per day, according to American Petroleum Institute data.
If U.S. oil demand remains soft, that would help offset likely increases in Asian hemisphere demand, and also make it unlikely that brimming global inventories, which totaled a 59.1-day oil supply in December for the developed world, according to International Energy Agency data, will decline substantially in 2010. As a result, oil's upside will be limited. In fact, had oil's price been determined solely by supply-demand fundamentals, oil's price would be considerably lower than the current $78-per-barrel price.
However, as most investors know, oil in the initial decades of the globalization era is more than an important commodity and its price is driven by factors other than supply and demand: Oil is also an asset class, a hedge against U.S. inflation and possible further weakening in the U.S. dollar.
And concerning the latter, the dollar, too, may help stabilize oil's price in 2010 Signs that the U.S.'s high budget deficit has peaked. And a likely, earlier economic recovery in the U.S. compared to Europe has led some to conclude that the dollar will stabilize in 2010 versus the world's other, major currencies (euro, British pound, yen). Perhaps it will even rise. If that occurs, that would act as another downward pressure on oil prices, as oil, which is priced in dollars, tends to fall when the dollar rises, and vice-versa.
Oil: The Bullish Argument
Still, the above is not to suggest that bullish oil forecasts don't exist. Economist Jeff Rubin, who accurately predicted that oil would hit $100 in 2007, is predicting that oil prices will top the $100 level again in the fourth quarter of this year, Bloomberg News reported. The former chief economist for CIBC World Markets argues accelerating demand in Asia and the Middle East will force consuming nations to rely on costlier, unconventional energy sources, such as oil sands. Rubin said he expects oil to be in the $90-range by March.
Oil hit an all-time high of $147.27 per barrel in the summer of 2008 amid the leveraging bubble, only to crash to about $35 in December 2008 as the bubble burst and the global recessions ensued. Over the next six months, oil trended higher, roughly doubling by July 2009, and has since traded in a $65 to $80 range.
Any Relief for U.S. Motorists?
But let's suppose oil prices do moderate in 2010. Now, in a normal market, that would historically mean some relief for U.S. motorists, who have seen the average price for unleaded regular soar about 93 cents or by 51% in the past year, to $2.74 per gallon, as tracked by gasbuddy.com.
Unfortunately, gasoline prices may not moderate much, even if oil prices do. The reason? U.S. refiners, who have seen their margins -- the profit they earn from refining crude into gasoline -- pinched, will do their best to take advantage of those lower oil prices to restore those margins. In fact, margins have been squeezed so much that some refiners have stopped refining oil into gasoline.
Further, if U.S. gasoline demand rises seasonally -- Americans use more gasoline in the spring and summer -- as it historically does, refiners may try to capitalize on that bullish demand condition by raising the prices they charge gas stations for gasoline. If gas stations and convenience stores choose to pass all of that price increase on to consumers, gasoline prices will likely rise this spring and summer, even if oil prices top-out around $80 per barrel.
Of course, a large $20 to $25 drop in the price of oil to around $50 would take pressure off U.S. gasoline prices at the consumer level.
However, assuming crude stabilizes at roughly $70 to $80 per barrel in 2010, about the best U.S. motorists can look forward to is a modest increase in gasoline prices. Meanwhile, businesses would have the small comfort of knowing that, at least for now, oil prices are not in triple-digit-territory. Admittedly, that's not much of a break, but it's about the best U.S. motorists and businesses can look forward to in today's oil-intensive economy.
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