Oil prices ended the day above $80 per barrel this afternoon, closing up 35 cents at $80.16 per barrel on the New York Mercantile Exchange.
Oil prices have largely detached themselves from the traditional fundamentals of supply and demand in recent times. Oil demand, while forecasted to grow in developing nations during 2010, remains sluggish at best in the United States and is showing only marginal improvements in other major economies around the world.
Retail gasoline demand also remains muted, with the most current data from the Energy Information Administration (EIA) placing U.S. gasoline demand at roughly 8.5 million barrels per day. Additionally, refining activity is down as EIA data indicates refineries are now running below 80 percent capacity for the first part of the year. Reportedly, U.S. retail gasoline supplies currently have a healthy cushion of nearly 27 days worth of gasoline in stock.
As has been the case during the past several months, the movement of oil prices is being driven largely by broader economic issues. Much of the price jump to open the week may be attributable to the widespread belief among investors that the Federal Reserve will keep interest rates low for the foreseeable near future. Thus far, weak employment data and only moderate improvements in manufacturing data have convinced policy makers the economy is still on shaky footing and that interest rate hikes should be avoided in the short term.
The link between interest rates and oil prices is an indirect, though important one. Low interest rates, coupled with other factors like government spending, can lead to a weaker U.S. dollar. The weaker the U.S. dollar, the cheaper commodities like oil become for foreign investors using other currencies to buy. As a result, the price is driven up.
Low interest rates will likely remain until the economy improves or inflation becomes a problem. Currently, inflation doesn’t seem to be a concern and, while there are certain signs of economic improvement, robust economic and employment growth is likely months if not years away, according to industry experts.
Of course, other factors are contributing to the recent rise in oil prices too.
Global tensions have flared a bit regarding the continued uncertainty in Iran over its nuclear ambitions. The issue involves several of the world’s top oil producing and consuming nations and therefore directly impacts oil prices. The Iranian situation is by no means new and will likely remain a factor in oil prices for some time to come. Seasonal price trends may also be playing a role in the direction of prices. The spring driving season, a period traditionally marked by increased gasoline consumption, is just around the corner and investors may have begun factoring it into futures prices. Also, labor strikes at refineries in France are also said to be a factor in oil prices moving higher.
Thus far in 2010, the markets have not been able to sustain oil prices above $80, instead seemingly preferring to keep them in a range from $70-80 per barrel.
Despite the relative volatility of oil prices in the first two months of 2010, retail gasoline prices have been able to stay within a 15-cent band - between about $2.61 and $2.76 for self serve regular - since the start of the year. While the national average price reached its 2010 low just a few days ago (Feb. 17) retail prices have followed oil prices and have begun creeping back up in some markets. If oil prices show strength during the remainder of the week, this trend will likely continue.
As of this morning, the national average price for a gallon of self serve regular was $2.648, or a little more than 3 cents higher than the average price one week ago.
