Oil prices edge down, near October lows
Oil prices close at $84.10 a barrel, weighed down by global economic weakness and rising production. Oil prices are now 25 percent below their high in February.
The¬†price¬†of¬†oil¬†fell slightly Friday on the prospect of weak economic growth with no immediate assistance from the U.S Federal Reserve.
Oil¬†ended the week at $84.10 per barrel, within $1 of its close last week. It remains near its lowest level since October of last year.
Higher¬†oil¬†production and weakness in economies around the world that are now burning less gasoline and other fuels have helped push down crude¬†prices¬†14 percent in the last month and 25 percent from a high in February. Reports in recent days of weak job growth in the U.S., a deepening financial crisis in Spain and slowing growth in China have rattled markets.
"It's a world of terrible news and a huge build (of¬†oil¬†stocks)," says Rich Ilczyszyn, an analyst and founder of the trading firm iiTrader.com.
U.S. drivers have welcomed the lower¬†oil¬†prices, though. Retail gasoline¬†prices¬†have fallen steadily since their peak of $3.94 a gallon April 6. The national average fell half a penny to $3.555 Friday, according to theOil¬†Price¬†Information Service, AAA, and Wright Express.
U.S. benchmark crude fell 72 cents Friday, a drop of 0.8 percent. Brent crude, which is used to make gasoline in much of the U.S., fell 46 cents to $99.47.
More declines could be on the way. Julian Jessop, Chief Global Economist at Capital Economics, thinksoil¬†prices¬†will end the year "much lower than they are now."
Demand for¬†oil¬†to make fuels for shippers and travelers is down because Europe remains mired in a debt crisis and economic growth in the U.S. and China has slowed. At the same time,¬†oil¬†supply has risen in recent months.
Production in Libya, Iraq and the United States is growing. Saudi Arabia has been pumping more¬†oil¬†to offset supply loses from Iran, which is struggling to export crude under tightening Western sanctions. Output from the OPEC rose in May to its highest level since October of 2008, according to Platts, the energy information arm of McGraw-Hill Cos.
By the end of last week,¬†oil¬†prices¬†had fallen to $83.23, down 25 percent from a high of $109.77 on Feb. 24 and down 14 percent from $97.01 on May 8.
This week, though,¬†oil¬†began to rise on hopes of a U.S. financial stimulus plan before returning to very close to their recent lows.
Investors thought Federal Reserve Chairman Ben Bernanke would unveil a plan to buy bonds or take other measures that would lower interest rates. When borrowing costs fall, it effectively boosts the amount of money in the economy, giving investors cheap money to buy¬†oil¬†and other assets. This also lowers the value of the dollar and makes¬†oil¬†less expensive for overseas buyers.
But Bernanke told Congress Thursday that no plan was imminent. That sent the value of the dollar higher.
Without the prospect of cheap and abundant dollars Friday, investors were left with simple choice: Whether to buy or sell¬†oil¬†based on world supply and demand. They sold.
Addison Armstrong, an analyst at Tradition Energy, said that based on supply and demand, there was no reason for¬†oil¬†to cost as much as it did earlier this year. It is now near a¬†price¬†he considers "fair value."
One of the chief reasons for the recent drop in global¬†oil¬†prices¬†is the change in the growth prospects in China. Judith Dwarkin, Chief Energy Economist at ITG Investment Research, said China is expected to account for half of the overall growth in global¬†oil¬†demand.
But growth in China has been slowing sharply. Investors expect the country will soon reveal that growth continued to slacken in May. If China is not using more¬†oil, global demand won't rise nearly as much as expected ‚ÄĒ if it rises at all.
"Imports of crude (into China) have fallen, taking the steam out of world crude¬†prices," Dwarkin said.
China cut state-set gasoline and diesel¬†prices¬†for the second time in a month on Friday in an effort to reduce costs for drivers and shippers, part of a larger plan to try to reverse a sharp slowdown in the world's second-largest economy. The 26-cent-per gallon cut reduced gasoline¬†prices¬†in Beijing, which has among the most expensive gasoline¬†prices¬†in China, to $4.58 per gallon.
Though the government¬†price¬†cut may boost¬†oil¬†demand somewhat in China, investors interpreted the cut as an indication that the slowdown in economic growth might be even more drastic than anticipated.
In other energy trading, natural gas futures rose 3 cents to close at $2.30 per thousand cubic feet. Heating¬†oilfell less than one cent to close at $2.67 per gallon. Wholesale gasoline rose 6 cents to close at $2.68 per gallon.