The swift drop in oil prices in recent weeks may have motorists cheering, but the financial world is in a tizzy over whether there is a larger meaning behind the shocking plunge in the commodity that greases the global economy.
“The thing you have to worry about when you have a precipitous drop like this is it could be signaling bad things for everybody,” said Phil Flynn, senior market analyst at Chicago-based Price Futures Group. “That’s the big concern.”
American motorists are saving about $80 million a day, thanks to a 20-cent-a-gallon drop in the price of regular gasoline since Oct. 1.
Businesses like lower oil prices, too. But if companies think the decline portends an economic slowdown, the firms may rein in spending and hiring. Those fears can spread into recession.
The long-running bull market is already under pressure from the Federal Reserve raising interest rates, from tariffs between the United States and China, and from a sell-off in technology stocks. Continued pressure on oil prices could drag stocks even deeper.
Stocks declined again Wednesday, with the Dow Jones industrial average dropping 205 points. The blue-chip barometer is 7.48 percent off its all-time high on Oct. 3. The Nasdaq composite is down 12.7 percent from its Aug. 30 peak. The S&P 500 is 8.7 percent below its Sept. 21 record.
Flynn rated the six-week oil price pullback “a minor bust.”
Benchmark Brent Crude and West Texas Intermediate, or WTI, both saw price increases on Wednesday, snapping a 12-day losing streak. Brent was $65.70 per barrel, up 0.41 percent on the day. West Texas Intermediate closed at 55.86, up 0.36 percent. Each is down more than 20 percent from their highs in the beginning of October.
The magic number is $50 per barrel.
“We are clearly in the ‘danger zone,’ ” said Frank Verrastro of the Center for Strategic and International Studies. “For U.S. producers, sustained prices below $50 would undoubtedly be problematic for all but the most efficient operators.”
Two days ago, the International Energy Agency issued a report that trimmed its forecast for oil demand growth in 2018 and 2019, citing a weaker economic outlook, a China slowdown, trade concerns and even higher oil prices.
Several experts echoed Flynn, saying the current oil price pullback is temporary and they expect Brent and WTI to settle in a range of $50 to $80 longer term.
“That is the band where neither consumers nor producers are hurt,” said Bob Tippee of Oil & Gas Journal. “There is some of a swoon right now. This is the kind of gyration that is part of market psychology. The market is fundamentally softening. Demand growth has slowed.”
Energy analyst Pavel Molchanov of Raymond James sees oil prices toward $100 a barrel by 2020.
“The big picture is very bullish,” Molchanov said in a recent interview.
The current surplus is largely attributed to a miscalculation between demand and major producers, including Iran. A strong dollar is also weighing on oil prices because it makes oil more expensive to much of the world. Oil prices tend to fall as a result.
The good news is that pump prices have dropped 20 cents in the past six weeks, from $2.88 per gallon for regular gas to $2.68, according to the American Automobile Association.
That savings is fattening consumer pocketbooks as the holiday season approaches.
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