Doomsday talk of gas prices spiking to $5 a gallon and crude oil cruising beyond $150 a barrel appears to have been sorely premature.
With supplies at very healthy levels and Iran and the West meeting at the negotiating table instead of the war room, crude oil prices have retreated more than 6% since late February. Even gasoline prices have started to ebb lower.
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Depending upon how talks go with Iran about ceasing its nuclear program in exchange for lifting sanctions crippling its economy, consumers and businesses could see oil prices tick even lower.
“If there is some type of agreement with Iran where they will back off their nuclear program and end the oil embargo, prices could collapse,” said Phil Flynn, a FOX Business contributor and an energy analyst at PFGBEST.
A new report from Barclays suggested that U.S. retail prices at the pump could “very soon” tumble below year-ago levels for the first time since October 2009.
“It does look as if the oil market has opted for a period of quiet reflection. This may not be a very exciting quarter, but that might not be a bad thing,” Barclays analysts wrote in the note.
So how did the oil price spike fizzle so quickly?
Flynn says it all goes back to Iran.
Fears that a conflict with this giant oil producer would paralyze supplies created a “risk premium” in the price of crude. As the tensions between Iran and the West mounted, crude prices responded to each and every headline, true or not.
At its highs, crude oil soared above $110 a barrel, nearing the highest level since last April when the conflict with Libya caused panic buying.
The Iran jitters hit the energy markets just as seasonal pressures traditionally drive prices higher anyway, creating a multiplier effect.
The fear about Iran also drove oil-consuming countries to stockpile crude in the event of a military conflict, driving prices even higher.
“There was a run on the oil bank so to speak. There was a lot of panic buying,” said Flynn.
"The cycle of repeatedly tightening fundamentals evident since 2009 has been broken for now," the International Energy Agency, which represents major energy consuming countries, said in a new report on Thursday.
The IEA report said global oil inventories soared by as much as 1.2 million barrels per day last quarter. The surge in supplies means fundamentals will be balanced even when Iran’s one million barrels a day are removed from the markets, the report said.
But in recent weeks fears about a war with Iran have receded as the rhetoric has cooled.
Since closing at $109.77 on February 24, crude has slumped 6.32% to $102.83 on Friday. Oil has retreated four of the past five weeks.
And for the first time in months gasoline prices have begun to head south. According to AAA, the national average price of regular gasoline fell to $3.901 on Friday, down from $3.907 on Thursday and $3.936 the week before.
“Calmer conditions” are “beginning to prevail,” Barclays said.
Of course, some of the decline in the price of crude can be chalked up to renewed concerns about global growth that have been sparked by new jitters in the eurozone about Spain, a lackluster U.S. jobs report and China’s slower-than-expected economy.
But oil watchers are keeping a close eye on the Iran situation.
Flynn predicted a steep decline in energy prices if the meetings this weekend in Istanbul produce a breakthrough.
“We could see gasoline prices go below $3 a gallon,” said Flynn.
Encouraged by the recent developments, Barclays slashed its crude oil outlook this week, lowering its 2012 target by $5 to $105 a barrel and 2013 view by $10 to $115.
“With prices already high and with no momentum to draw on, it is likely to take a significant catalyst to generate any significant and sustained upside in Q2,” Barclays wrote.
If forecasts for stable to lower oil prices come true, it will be a huge relief to policymakers worrying about high gas prices eating into discretionary spending by consumers. It will also help companies that rely on crude to produce and transport products.