Why are Oil and Gas Prices Dropping?

donshan · Last edited by donshan on Mon Oct 31, 2005 12:17 pm; edited 1 time in total

I see today that Oil prices have dropped below $60/ bbl , and gasoline contracts are now below $1.60/ gal; down considerably from recent peaks well over $2.00.

I would appreciate any thoughts from the experts here ( I am not one) on what is going on. I see two broad possibilities, but there are probably others. Also, if one knew for certain what is going on here they could become a millionaire!

Possible reason 1) Governments world-wide and the major oil companies realize that the drop in consumer sentiment as a result of high oil and gas prices could produce a world-wide recession. The release of large volumes of oil and gasoline/diesel from strategic reserves and Big Oil have temporarily flooded the market with supply in order to squash predictions of $100/bbl oil, and restore confidence. This would be similar to Monetary interventions to temoraritly move markets opposite to the speculators position and try to wipe them out. If this is the case, then in a short while the interventions in oil pricing will end, and the trend of oil prices upwards will resume. But that will be next year.

Possible reason 2) The high price of oil and gasoline/diesel has curtailed demand and increased world production to completely offset the effects of Katrina/Rita on supply. The market is now coming back into balance, there no longer is a shortage of oil for the near future and oil is heading back below $50. This would prove the economists right, and validate the view of EIA that oil will still be under $50 ten and even twenty years from now. In other words, increased price can keep oil supply going for decades to come.

Obviously it makes a world of difference of where oil will be next year and whether PO has already occurred or not, depending on which view ( or others) is correct.

Any enlightenment would be appreciated.
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WisJim

It seems that around here gasoline is down and diesel is up. I think that the maximum amount of gasoline is being produced (which is reducing the amount of diesel produced) in order to make people think that the problem is less severe than it really is.

Maybe folks will start to be concerned if heating costs go up a lot.

jmacdaddio · Heavy Crude Joined: May 14, 2005 Posts: 213

Part of it is a reduction in demand. I think a lot of US drivers are cutting back unnecessary trips and consolidating errands. Cocktail party chats about gas prices point to a general acceptance that gas will not go back to $1 or even $1.50 per gallon, and that prices will trend up from here on out (even though prices are going down now).

Heineken

Don't worry, the faster prices drop the sooner demand will pick back up again.

The pattern has been, and will continue to be, two steps forward, one step back.

I think the idea that U.S. drivers are "cutting back" is largely a myth. Most trips are necessary, or at least that's the way drivers view them. Anecdotally, I haven't noticed the slightest difference in congestion on those occasions when I've driven to urbanized areas.

pip

Demand per the DOE has been down around 2% for most of the month of Oct compared to last year. The price has been dropping since those numbers started coming out. Just MHO.
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JoeW

I don't think there's any big conspiracy to push prices down. There are two issues:

1) Loss of refinery capacity has reduced demand (and prices!) for crude.
2) The resultant high prices of refined products caused by #1 has been mitigated in the US by increased imports of refined products and by demand falling short of expectations.

The focus on manufacturing gasoline rather than heating oil is probably profit-motivated at this point.

Monk · Heavy Crude Joined: Aug 02, 2005 Posts: 150

cuz its a tradeable market.... and in bull markets.... they take 2 steps forward and 1 step back..... nothing goes straight up.

aahala · Intermediate Crude Joined: Feb 03, 2005 Posts: 954

How about an unenlightened opinion?

I would like to believe US demand has dropped more than 2%, but I have found little evidence of that, certainly not enough to cause my local gasoline prices to fall as far and as rapidly as they have.

IMO, there has been a moderately large percentage drop in oil demand in
third world countries. These official world consumption figures are probably pretty "fluffy" -- they are back of envelope estimates. Countries
like the US, many can just open their billfolds and pay 50% more, using
the same, but people in the third world can't do that.

Clouseau2

gt1370a · Heavy Crude Joined: Apr 02, 2005 Posts: 341

Traders try to anticipate the future. News to us is old news to them (example, when the report came out on Friday that the economy was growing 3.8%, an oil trader was quoted as saying "This is old news."). The reason the price is going down is because they expect lower demand in the future.

donshan

Sleepybag

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Demand is actually reduced in several third world countries. Indonesia had to stop their fixed-price policy, since it was costing them too much of the budget. Several similar reports came from other countries. Increased prices have reduced demand, but not much in the Western World.

Secondly, crude oil availability is not the only critical chain in the supply of petrol. Worldwide, refineries are working at maximum capacity right now. This, on its turn, is due to refineries still offline in Louisiana and the fact that crude oil is getting heavier. (Heavy Sour was the only spare oil the Saudis had on the shelf). Refineries are finaly making a profit on their activities.

In the week to come, the Shell Rotterdam refinery (the biggest in Europe, 400,000 b/d capacity) will go offline, because of a strike. So, in my theory, reduced refining capacity = higher refinery margins. Let's wait, but I think that oil prices will remain stable, but prices at the pump will rise.
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Monk · Heavy Crude Joined: Aug 02, 2005 Posts: 150

donshan

Cool Hand Linc

Simmons and ASPO look at data that shows how much oil has been produced. Then subtract the amount of production from the claimed reserves. Giving as close a number as we can get currently. OPEC countries began giving ultimate recoverable reserve numbers back about 78 or 79. They have been reporting nearly the same amount ever since. Simmons also looks at things like water cut from wells to help determine the health or age of these wells. Again OPEC countries are not sharing so Simmons and others interview engineers who were in these countries working for these countries oil companies and get data that way.

Side note: The USGS began adding in Canada’s tar sands in their recoverable reserves data.

When looking at all the oil related data. It is important to separate the different kinds of oil to ensure correct data.

Simmons and ASPO and most who have read a lot and keep up to data the data understand that price spikes and then drops in between will reoccur over time.
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