Just months ago, some energy-market prognosticators spoke about $150-a-barrel oil like it was a foregone conclusion.
Today, crude is worth barely half that scary figure.
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Crude tumbled below $80 a barrel on Thursday for the first time since last fall in yet another stark display of diminished global growth prospects and overflowing supplies of crude.
While consumers will understandably cheer the cooler oil prices, as they translate to moderating costs at the pump, the selloff from the February highs doesn’t paint a pretty picture about the economy.
“It’s a bitter sweet pill for the consumer,” said Stephen Schork, editor of the Schork Report. “The only reason we’ve gotten down to this level is because the (economic) outlook over the next six to 12 months is absolutely grim.”
After diving 2.65% on Wednesday, crude suffered its steepest one-day selloff since mid-December and ended below the $80 threshold for the first time on since October 5. Crude closed at $78.20 a barrel, down $3.25, or 3.99%.
In the wake of Thursday's dive, crude has plunged 28.76% since supply jitters sent it soaring to 52-week highs of $109.77 back in February. By comparison, the S&P 500 has only dipped 6.6% from its 52-week high of 1419.04 in early April.
“The supply concerns that we saw back in the fourth quarter and first quarter have been mitigated. Now the focus is on demand,” said Schork.
Economic Gloom Sparks Demand Jitters
Market watchers were particularly alarmed on Thursday by HSBC’s flash manufacturing gauge in China, which slipped to 48.1 in June from 48.4 in May, marking an eighth straight month of contraction.
Since oil peaked in February, the eurozone appears to have entered into a double-dip recession as its debt debacle has intensified to the point that Greece’s ability to remain in the currency union was being openly speculated about.
Likewise, growth in the U.S. has slowed drastically, so much so that many were calling for the Federal Reserve to kick off a third round of quantitative easing to boost the economy. The central bank’s refusal to enact QE3 also helped weigh on commodities like oil.
New reports released on Thursday showed manufacturing activity in the Philadelphia region plummeted to -16.6, badly missing forecasts for zero and the worst reading since August.
“We’ve had months of macroeconomic indicators from China [suggesting] they are slowing and could be headed for a hard landing. Europe is in the toilet and the United States is muddling along,” said Schork.
Inventories Flush With Supplies
Just as the macro picture has darkened considerably, the energy markets appear to be well stocked for any potential supply concerns. Fears about a conflict with Iran causing an oil-price shock have diminished thanks to easing tensions and Saudi Arabia ramping up production
Earlier this week, the Department of Energy released new data that highlights just how flush oil inventories are. Crude inventories surged by 2.9 million barrels last week, blowing away estimates for a decline of one million barrels.
U.S. crude stockpiles are inching closer to their all-time record highs set in 1990.
Domestic production has jumped by about 1.2 million barrels a day since crude peaked at $145 in the summer 2008, according to Olivier Jakob, managing director at Petromatrix. That helps explain why domestic inventories stand 86 million barrels taller than four years ago.
“Increased pipeline and rail transport infrastructure since then means that the U.S. crude oil supply security has never been this high,” Jakob said in a note.
$70 Crude Ahead?
The lower energy prices could give a boost to the U.S. economy, providing cash-strapped consumers with a break and decreasing companies’ cost of manufacturing and transporting goods.
According to AAA, the average price of a regular gallon of gasoline dipped to $3.472 on Thursday, down from $3.487 on Wednesday and $3.680 a month ago.
So given the bearish fundamentals and gloomy growth prospects, how low will crude oil prices go?
Schork believes crude could easily sink another $5 to $10 a barrel to the low $70s.
Jeff Mower, editor-in-chief of Platt’s Oilgram Price Report, said he wouldn’t be surprised to see that kind of further slump.
Of course, the wild card could be Saudi Arabia and OPEC, neither of which wants to see crude prices dip too low.
“If prices drop far enough you may actually see them curtail production. It all depends on how quickly producers act,” said Mower.