The Car and Truck Fleet and Leasing Management Magazine

Oil Prices Continue to Drop

September 14, 2006

WASHINGTON, D.C. --- In the past five weeks, oil prices, both for crude oil and petroleum products, have dropped substantially. The price of West Texas Intermediate (WTI) crude oil has fallen from $77 per barrel to below $64 per barrel. Retail gasoline prices have dropped 42 cents per gallon to $2.62 as of Sept. 11. At the same time, retail diesel fuel prices, at $2.86 per gallon, are now about 20 cents per gallon lower than they were five weeks ago. So will the declines continue, or will they begin to level off and possibly increase later this year? In its newly released report titled "Short-Term Energy Outlook," the Energy Department's Energy Information Administration (EIA) said it expects the price of WTI crude oil during the fourth quarter of 2006 to average around $70 per barrel, gasoline prices to average below $2.60 per gallon, and diesel prices to approach $2.80 per gallon by the end of the year. EIA predicted the recent price decline to slow, with prices then leveling off and possibly increasing later this year. This outlook reflects the EIA's analysis of the factors driving the current price decline. For crude oil markets, the global situation is about as stable as it has been in the past several months. In its regular weekly report, the EIA noted: "Almost every concern that existed in crude oil markets this summer is much more benign now. Concerns about a possible oil disruption from Iran have faded, as the diplomatic push to get Iran to halt enrichment of nuclear material has not yet led to sanctions imposed by the United Nations Security Council, and Iran has stated recently its willingness to continue negotiations with the United Nations." Moreover, mid-September has arrived without a single hurricane affecting oil facilities in the Gulf of Mexico and with no storms likely to arrive within at least the next week. Nigeria, where significant disruptions have occurred with some frequency over the past several years, has been quiet. "The oil situation in Iraq is as positive as it has been in nearly two years, with EIA estimating Iraqi crude oil production in July and August at its highest levels since the fall of 2004. Even the one disruption that did make news recently, the BP pipeline leak in Alaska, now appears to be much less of a problem than originally thought," the report continued. At first, there were worries that Prudhoe Bay production might be halted entirely. However, only a part of production had to be taken offline for an extended period. According to the state of Alaska, Prudhoe Bay production for the month of August averaged 189,000 barrels per day, which is about half of its August 2005 level. BP recently announced plans to begin to bring more production online soon and hopes to have full production restored by the end of October. For gasoline markets, the price drop that normally arrives after Labor Day began a few weeks early, as the market entered the last few weeks of August with no hurricanes threatening petroleum infrastructure and with enough supplies on hand to get through Labor Day. Currently, the near-month futures price of a barrel of gasoline is only $1 to $2 above that of a barrel of crude oil, an unusually low margin that is likely to increase over the coming months, the EIA said. Diesel prices have not dropped as much as gasoline, mostly because diesel demand tends to be strong in the fall with agricultural use of diesel increasing as crops are harvested. Also, the similarity of diesel to heating oil often causes diesel prices to rise in conjunction with heating oil as the winter approaches. Thus, declines in diesel prices have been limited to those caused by the decline in crude oil prices, the EIA said. The EIA added: "Unless the U.S. economy starts showing signs of a significant slowdown, which would slow oil demand growth, or an unusually warm winter in the northern hemisphere that depresses heating-related demand, the opportunity for further improvement in crude oil markets appears to be limited." The global balance is expected to remain relatively tight as long as global demand continues to increase at a faster pace than non-OPEC supply, limiting gains in global spare production capacity. This implies that the downward trend in prices is likely to stop or reverse if one of the many potential sources of supply trouble flares up or if product pressures from heating fuels pull up crude oil prices once cold weather begins.
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