Demand Destruction, Euro Zone Debt Push Crude Price Down
Economic factors and supply outweigh geopolitical tension
WASHINGTON (Feb. 6, 2012) — The price of West Texas Intermediate (WTI) crude oil declined 93 cents per barrel today to settle at $96.91 at the close of formal trading on the NYMEX. Crude continues to be primarily influenced by demand destruction and euro zone debt concerns providing downward pressure on prices. These factors have outweighed the impact of geopolitical tension with Iran and positive signs for the U.S. economy, which might otherwise pressure prices higher.
Adding to oil’s slide was today’s news of renewed focus on Greek economic woes and that country’s struggles to enact the austerity measures necessary to receive a second round of bailout funds. These funds are needed to avoid Greek default on its debt obligations, which would threaten the broader economic stability of the euro zone. Crude oil futures are priced in U.S. dollars. As was the case today, as economies weaken overseas, the dollar strengthens and the price of oil becomes relatively more expensive for those holding foreign currencies. Oil futures become a less attractive investment which exerts downward pressure on prices.
WTI prices settled below $100 per barrel each day last week. This was the first time that prices have spent two consecutive weeks below that mark since the beginning of November last year. Last week’s weakness continued the tug-of-war that has characterized crude markets to begin 2012 — between factors exerting upward pressure on prices and those exerting downward pressure. While demand destruction both in the U.S. and overseas has weighed on crude prices, more dramatic downward price movement has been limited by the specter of a potential disruption to supply, as tension has continued to build with Iran. At the same time, the impact of positive news for the U.S. economic recovery has been largely offset by bearish news surrounding the euro zone. Last week’s Department of Energy report confirmed that U.S. demand for oil is at a more than ten-year low but came on the same day as reports that Iran had threatened retaliation against the West for sanctions. The net impact on crude prices was WTI moving lower, settling at a new 2012 low on Thursday at $96.36. Friday’s positive U.S. jobs report pressured crude prices higher, but Greek debt concerns tempered the ultimate impact on prices.
While the price of WTI crude oil has slumped slightly in recent weeks, the price of gasoline at the pump has continued to increase. Reports show extremely weak gasoline demand, however refiners are responding to this decrease in demand by cutting back on production, resulting in some upward movement in prices for motorists. The current national retail average price for a gallon of self-serve regular gasoline is $3.48. Today’s price is five cents more expensive than one week ago, 11 cents more expensive than one month ago, and 36 cents more expensive than one year ago.
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