Tags: Oil | Price | Declines | crude

Big Oil Users Said to Expect Further Price Declines

By    |   Tuesday, 26 Jun 2012 11:43 AM

Many large energy consumers expect oil prices to decrease further, as airlines, trucking companies and other big energy users are reluctant to lock in at current levels, The Financial Times reported.

The price of Brent crude oil has fallen from a high of $128.40 a barrel in March to $88.49 a barrel last week, the lowest since December 2010.

Oil consumers fear that the current decrease in prices is the beginning of a major sell off, according to the Times. The price decreases are mostly due to slower economic growth in China and the European debt crisis, as well as Saudi Arabia increasing its production to a 30-year high.

“If the global economy continues to deteriorate, I will not be surprised if we see more downward pressure on oil prices,” Fatih Birol, chief economist of the International Energy Agency, told the Times.

Commodities brokers said consumers are mostly on the sidelines of the oil market, which removes a key source of forward buying from future oil prices.

"It also mimics the behavior of big consumers in late 2008 at the start of the global financial crisis, when they moved to the sidelines as prices plunged from an all-time high of nearly $150 to a low of $45," the Times wrote. "It could yet backfire if oil prices rise on the back of the U.S. and EU sanctions on Iran or if Saudi Arabia decides to cut its oil production."

A senior New York-based commodities banker told the Times that he expects some consumer buying if oil prices decrease another $10.

Anecdotal evidence of companies hedging against price increases confirms the bankers' views. For example, Laura Wright, chief financial officer of Southwest Airlines, told investors that the firm's hedge protection for the second quarter of the year was "minimal," the Times reported.

Moreover, Birol noted that the decrease in prices was similar to a "tax break to consumers and businesses" and will improve companies' profitability.

Michael Glenn, executive vice president of FedEx, said last week that "lower fuel prices will help," according to the Times.

Meanwhile, the price of gasoline has dropped to the lowest level in five months, giving motorists some relief ahead of the July 4 holiday, the Associated Press reported.

The national average fell below $3.40 per gallon on Tuesday. It has fallen steadily since peaking at $3.94 in April as oil prices dropped and supplies of summer-grade gasoline grew around the country.

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