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A recent drop in oil prices can be attributed primarily to futures traders focusing exclusively on the troubled U.S. economy and ignoring other factors, according to economists.
Unfortunately for businesses and consumers looking for a break on gas prices, those same economists are not expecting the price freefall to last much longer.
On Wednesday, the price of light, sweet crude settled at US$124.44 a barrel. That was down from a high of $147 a barrel earlier this month. According to Patricia Mohr, VP of industry and commodity research at Scotia Economics (TSX:BNS), traders, particularly those in New York, have grown so concerned about the slowdown in demand for petroleum in the U.S. that they are turning a blind eye to other elements that typically send prices up.
Those include a recent threat by Nigerian rebel groups to attack oil facilities in that country, rising tensions between Iran and the U.S, and the potential impact of Hurricane Dolly, which crashed into southern Texas on Wednesday.
“Although it didn’t cut offshore oil and gas production, it probably shut some U.S. refinery production at least for a few days. But again, [it was] totally ignored by the market,” Mohr said.
Some “real, genuine worry” was also generated by last week’s gloomy U.S. Federal Reserve semi-annual monetary policy report, Mohr added.
“I think it sent alarm bells through the economy, so now the traders are focusing on slow [oil] demand.”
Another report from the U.S. out next week should help to put an end to the price fall, Mohr said.
“The U.S. Department of Energy puts out its statistics on U.S. oil inventories and consumption. I suspect they won’t look quite as positive as they have in the last couple of weeks, partly because of Hurricane Dolly.”
As a result, “We’ve seen most of the decline [in oil prices] that’s going to happen for the next while.”
Earl Sweet, senior economist at BMO Capital Markets (TSX:BMO), also attributed the recent price drop to the actions of speculators, but said their worries were primarily brought on by a weakening in European economies. Previously held beliefs that those markets would continue to grow, however modestly, appear to be crumbling.
“If you look at the economies of Spain and Italy, they are in serious trouble,” Sweet said. “Consumer [confidence] is slowing down quite a bit in France and production in Germany has taken a real hit. When the fundamentals look like they’re weakening, that causes the speculators to take note.”
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