Oil prices, which plunged nearly $6 on Monday as the Wall Street crisis rattled investors, are likely to continue falling even more, experts say.
Though gasoline prices are likely to rise back to around $4 a gallon in the near term because of the recent hurricanes in the Gulf of Mexico, they're still expected to drop back because of the continued slump in crude prices.
“All signs point lower,” said Fadel Gheit, an industry analyst with Oppenheimer & Co. “Gasoline could go up a few cents, but will quickly follow the direction of crude oil, which is down.”
Monday crude for October delivery settled at $95.71 per barrel, down $5.47 or 5.4% on the New York Mercantile Exchange.
Oil prices have plummeted in recent weaks because of expectations that the slowing world economy will cut into demand. The financial meltdown on Wall Street has only reinforced this view by putting a sustained economic recovery even further out in the future.
Bob Yawger, an energy futures broker with MF Global, said he expected crude to slip down to $85 by November, which could “conservatively” shave another 30-40 cents off of retail prices.
“There are lot of issues that point in that direction, I think $85 will be the bottom and I think you would look to see that happen some time in November.”
Commuters can expect retail gasoline prices will be vary widely around the country, with the southern states pinched by the highest price jumps, because they are the most dependent on refineries around the Gulf.
Those higher retail prices have already materialized in many southern states and they could go even higher another 10-20 cents.
“The closer you are to the hurricane, the worse it is,” said Peter Beutel, president of Cameron Hanover, an energy risk management firm in Connecticut.
But based on the declines in gas futures today he said he expected these to be temporary.
“There is no relief immediately…but it does look like there is going to be some relief coming at the pump, but I think it is probably a good month away, some time around Columbus Day,” said Beutel.
Subsequently, barring major disruptions, pump prices could decline further to $3.25 and in some low-cost states, such as Texas and New Jersey, test the $3 level, he added.
This is, of course, is premised on a continuing slide in crude prices but most analysts expect this will continue, reflecting the dour global economic picture.
Besides the gloomy economy, the woes of Wall Street has encouraged traders to unwind trading positions, putting further downward pressure on oil and gas futures, said Byron King, a long-time industry observer, now serving as an editor of Outstanding Investments newsletter. “There is a lot of momentum to take prices down.”
There is also a large supply of “wet barrels” on tankers idling for the last few weeks in the Gulf region, unable to unload crude to refiners in Texas and Louisiana, which has roughly 20 percent of the country’s refining capacity.
Drivers in the south and south-central states, most dependent on these refineries, could see pump prices raise to $4.25 in the next few weeks, he predicted.
But in the other parts of the country, particularly the Upper Midwest and New England, which have their own refineries or import from elsewhere could actually see prices drop 20 cents or more.
This is more likely, he said, because of substantial stockpiling of gasoline ahead of Hurricane Gustav and Ike, which raised the specter of more devastation than the storms actually delivered.
Western states are considered a separate market where prices are among the country's highest because of geography, taxes and environmental regulations.
Still, these hurricanes wrecked havoc that will take several weeks to fully recover from.
Tom Kloza, chief oil analyst at Oil Prince Information Service (OPIS), said the hurricanes’ will leave the US “coughing and wheezing with supply outages, dislocations, and even a few gasoline lines for the next few weeks.”
He said the trading community has underestimated how long the hurricanes' disruptions will “haunt US supply” and that commuters should expect gas prices around $4 perhaps into mid-October.
Without the hurricanes retail prices would have already slipped to $3.00-$3.25.
On the other hand, he said, “if the oil industry were to price gasoline opportunistically, we would be looking at $4.50-$5.00 gallon gasoline in the short-term.”
But gas suppliers were not taking advantage of all the implied increases in spot markets, he added, because “they are aware that the public, various government folks and plenty of media regard oil executives as about as warm and fuzzy as Josef Stalin.”
Commuters should expect widely variable prices because gas stations employ different methods for calculating how to charge their prices – sometime it is based on their replacement costs, other times, prices are based on their last wholesale purchase.
Analysts emphasized there were numerous geopolitical wildcards that coul upend the crude's downward trajectory. Lowering crude prices could also be undermined by a weakening dollar.