Are Oil Companies Still Squeezing americans?

February 25, 2008

(bettertrades) - On Thursday, oil fell below $34/bbl for the first time since December. The front-month crude contract slipped near a 4-month low as rising inventories and demand destruction continue to trump lower prices and OPEC supply cuts.

Despite oil trading near a 4-month low, prices at the pump still reflect the turn-of-the-year rebound in energy prices that sent the front-month contract back towards $50/bbl on the shoulders of the Israeli-Palestinian conflict and the Russia-Ukraine gas dispute.

Oil futures dropped for the fifth-straight session, down over 5%, approaching the December 19th close when the January contract fell to $33.87.

Rising inventories factored into today’s trading yet again. On Wednesday, February 6, the Energy Information Administration reported crude inventories built by 4.7 million barrels, well above the Wall Street’s expectations. Gasoline stockpiles declined by 2.6 million barrels and distillate fuels fell by 1 million barrels. Natural gas inventories declined 159 billion cubic feet, below expectations for a 170 billion cubic feet drop by some analysts.

The Paris-based International Energy Agency added fuel to crude bears’ fire by cutting their demand forecast yet again.

Support for oil appears to have been broken. Crude bulls have been keen to cite supply disruptions, wintry weather, and geopolitical tensions for their cause. Yet price rises have been intermittent and ephemeral since this summer’s $147/bbl high.

Even though crude prices are down nearly 77% from the July 2008 high, prices at the pump are only down about 50%. Given that the relationship between crude per barrel and prices at the pump is not a perfect correlation(there is a strong relationship), prices are elevated in terms of historical perspective. During the late 90’s when crude traded in the mid-$20/bbl, regular gasoline prices actually fell below $1 per gallon.

Today, with the front month crude contract trading around $34/bbl, the average cost for regular gasoline is just below $2/gallon.

One explanation may be that actual consumption is not falling at the pace with which crude traders are expecting, helping oil companies maintain higher prices. The failure of hedge funds, investment banks, and other commodity speculators that contributed to the run up in energy prices last summer has factored into the precipitous crude price decline. Yet actual demand destruction does not equal the percentage drop in crude prices. Greater comparable refinery costs and operating expenses may also be factoring into relatively higher gasoline prices.

Whatever the explanation is, oil companies are still managing to turn record profits despite a historic plunge in the price of the product they sell.