Crude oil markets tough to predict, continue to push pump prices lower

As U.S. and international oil prices struggle to stay above $80 barrel, many energy analysts fear that slow global growth and soft demand for energy could signal a permanent shift in the market for benchmark crude.

On Tuesday, prices for the two major benchmark futures, North Sea Brent and West Texas Intermediate (WTI) crude oil, were moving lower. The global Brent contract ended down 76 cents or 0.9% at $85.40 a barrel on the ICE Futures Europe exchange. Light sweet crude futures for front-month November delivery fell 4 cents at $82.71 a barrel on the New York Mercantile Exchange.

Kevin Kliesen, business economist and research officer for The Federal Reserve of St. Louis, said it is difficult trying to figure out exactly why crude oil prices have gradually declined over the last four months, ending with a precipitous 20% drop in the past week.

“The tricky part is that you’ve got so many other things going on that are affecting oil prices,” Kliesen said. “It is hard to disentangle what are the key factors driving prices.”

Kliesen did note that supply and demand factors are affecting crude oil prices, especially in the global market. Just last week, the Fed economist said, the International Energy Agency’s Oil Market Report for October reduced its forecast of global oil demand for 2014 by 0.2 million barrels per day (bbl/d) from the previous month, to 92.4 bbl/d), on lower expectations of economic growth and the weak recent trend. 

Kliesen also cited record U.S. oil and gas production driven by new and innovative technologies in U.S. shale plays as another reason for lower prices. Earlier this month, the U.S. Energy Information Administration’s forecasted that domestic crude oil production in 2015 is likely to reach its highest level in more than four decades, averaging 9.5 million bbl/d. If realized, the 2015 forecast would be the highest annual average crude oil production since 1970.

Overall, U.S. crude oil production averaged an estimated 8.7 million bbl/d in September, the highest monthly production since July 1986. Long term, Kliesen said he does expect international crude oil markets to recover, especially if global growth rebounds.

“We have large economics like China and India that will continue to grow relatively fast, and from that standpoint you would expect the demand for energy and crude oil to continue to increase and put pressure on prices,” he said. “But, we also learned in the past that new and innovative technologies have been developed to extract more and more energy; if that holds true, obviously we will see a greater level of supply as well.”

DOWNWARD PUMP PRICE PRESSURES
As oil prices have dropped sharply over the last several weeks, Arkansas consumers were rewarded at the pump with prices for regular unleaded at or below $3 a gallon. That trend should continue through the holiday season to the beginning of the New Year, analysts say.

The national average for a price of regular unleaded has now dropped on 26 consecutive days, according to AAA. Today’s (Oct. 21) national average price for regular unleaded gasoline is $3.09 per gallon, representing the lowest price since Feb. 1, 2011. Nationwide, drivers are saving an average of 60 cents per gallon compared to the 2014 high of $3.70 (April 28), and pump prices have tumbled 10% since Labor Day when the national average registered $3.44 per gallon.

In Arkansas, motorists today are paying in average of $2.91 per gallon to fill up their tank across the state, 25 cents cheaper than a year ago, according to AAA’s daily fuel gauge.

Pump prices in the state’s metropolitan areas range from a low of $2.81 per gallon in the Fayetteville-Springdale-Rogers area to a high of $2.96 in the Pine Bluff area. Motorists in the Fort Smith area are seeing prices at an average of $2.86 per gallon and travelers and residents at the Texarkana state line and in the Little Rock-North Little Rock area are paying an average of $2.90 and $2.95 a gallon to fill up their tanks, respectively.

Drivers choosing to fill up the tanks with a higher-grade of gasoline should expect to pay an average premium of $3.29 a gallon across the state. Big rig drivers and other diesel fuel users will see pump prices at about $3.51 a gallon, down five cents from only a week ago.

OIL PRICES, INFLATION AND CONSUMER CONFIDENCE
Still, questions remain on whether the falling oil prices are drastically affecting the rate of inflation and consumer confidence. The AAA says that for every penny the national average falls, more than $1 billion in additional annual consumer spending is estimated to be freed up.

On Friday, the Preliminary University of Michigan Consumer Sentiment for October came in at 86.4, the highest level since July 2007. Kliesen said the survey was taken before “all the recent turmoil” with the Ebola scare, the crude oil slide and stock market fears.

“Consumer confidence is a tricky thing,” he said. “It could be affected by oil prices, but people also see the stock market falling and the value of their 401K plummeting. All those things have an adverse effect on how they feel.”

Kliesen also said it is conceivable that headline prices for some consumer goods are falling because of lower energy prices, but noted the costs of housing and medical care as other major factors. The rate of inflation stands at 1.7%, below the 2% level the Federal Reserve judges is most consistent over the longer run for price stability and maximum employment. 

“It is not just energy feeding into lower prices and inflation. It is a lot of things,” he said.