Inside Financial Markets

Oil Prices Hit New 6-Year Low

Oil prices fell to a new 6 ½-year low Monday, raising the prospect of dramatically cheaper gasoline after the summer driving season.

For now, a blockbuster driving season and a major refinery outage are keeping pump price surprisingly high despite the plunge in crude.

A barrel of West Texas Intermediate declined 63 cents, or 1.5%, to close at $41.87 as abundant supplies and fears of a global slowdown continue to push down prices. That’s the lowest since March 2009 and it marks a tumble of 30% from late June and 55% from a year ago.

Yet the average national price of regular unleaded gasoline is $2.67, up from $2.59 a week ago but lower than the year-ago price of $3.46, according to AAA’s fuel gauge report. An emergency shutdown last week of BP’s Whiting, Ind., refinery, the largest in the Midwest, drove up gas prices in the region by 40 to 60 cents a gallon and the national average by 8 cents, figures from show. The outage is expected to last another month or so, says Tom Kloza, chief global analyst for the Oil Price Information Service.

Gas prices nationally have fallen by about 10 cents a gallon the past month. But the busiest summer driving season since 2007 and requirements in metropolitan areas for reformulated summer blends are keeping pump prices elevated, Kloza says.

“These are very high numbers for gasoline, given the price of crude,” he says. Many refiners, he says, are earning gross profit margins of $50 to $60 a barrel, compared to normal margins of about $5.

By next month, after the temporary factors fade, he predicts gas prices will fall 10 to 15 cents a gallon and to about $2 a gallon by the end of the year as pump prices align more closely with crude costs.

Oil Prices Hit New 6-Year Low as a result of record U.S. production, Kloza says. Despite sharp drilling rig cutbacks, U.S. producers are more efficient, keeping output high.

Meanwhile, Saudi Arabia and Iraq have ramped up production in recent months. And oil traders are betting on increased output from Iran next year, assuming a proposed nuclear deal that would lift sanctions against that country is approved by Congress.

Also holding down oil prices is an anticipated slowdown in consumption. China’s devaluation of the yuan last week has raised questions about demand in that country and Greece’s debt crisis has dampened economic activity in the euro zone, says Phil Flynn, senior energy analyst with the Price Futures Group.

Still, he expects sharp cuts in energy company investment across the globe to help push up crude prices to $50 to will $60 a barrel later this year.

Baqar Hussain

A Wannabe CFO, just had stepped in the corporate sector, willing to explore every aspect here and learn as mush as i can, awareness for those who dont, get the info where ever possible and stay up to date always.

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Inside Financial Markets was a joint publication of Pakistan Stock Exchange (PSX)and Society of Technical Analysts Pakistan (STAP)