Gas Prices, Gas Prices, Gas Prices

January 7, 2009

(bettertrades) - Near the close of trading on Wednesday, crude prices plunged more than 8% after the Department of Energy reported bigger-than-expected builds in inventories. The day's decline gave up a large percentage of this week's advance built on the Israeli-Palestinian conflict and Ukraine's dispute with Russia.

On December 19th, crude reached a near-term low of $32.40, threatening to fall below $30 on weakening demand. Israel's offensive in the Gaza strip sent prices rocketing back towards $50 before Wednesday's trading. A temporary cease-fire and this morning's Department of Energy report served to stop crude's unabated rise. The DoE reported crude oil stockpiles increased by 6.7 million barrels to 325.4 million barrels, more than the 1.5 million barrel increase analysts expected. Gasoline inventories climbed 3.3 million barrels, distillate inventories rose 1.8 million barrels, and refinery capacity increased 2.1% to 84.6%.

Demand continues to decline as global economies slip further into recession. The Energy Department reported aggregate oil product demand fell 2.9% compared to a year-ago. While the supply side lingers as a question mark given continued conflict in the Middle East, the demand function remains weak, suggesting resistance for higher oil prices.

Today's precipitous plunge in crude prices ended oil's frantic rise this week, yet prices at the pump will likely rise a few cents over the next couple days if crude prices don't extend the decline over the next several days. Gas station prices lag changes in the price of crude by several days, resulting in staggered changes in raw and refined products.

Natural gas prices dipped near $5.832/MMBtu in the wake of a weakening energy complex. The Russia-Ukraine clash over shipping supplies had propped up the near-term natural gas market until Wednesday morning.

Heating oil futures chilled 3 ½% to $1.567/gallon near the close of trading on Wednesday. Unusually warm weather in the eastern United States has helped cool seasonally inelastic demand for heating oil.

As the energy complex deleverages within the silhouette of a global recession, prices at the pump should remain in check over the short term. On Wednesday, oil tycoon T. Boone Pickens predicted crude prices would rise to $100/bbl by the end of 2010, around the time he expects economic activity to pick back up. Whether Pickens' forecast will come to fruition remains to be seen. Over the next few months, Americans can expect oil prices to remain at or below $2/gallon.