Crude oil and downstream fuel prices trend down

Diesel and gasoline price declines spark talk of commodity price crash

by Dave Hannon -- Purchasing, 8/6/2008 10:02:00 AM

Commodity buyers and supply chain professionals are cautiously celebrating the recent decline in gasoline, diesel and oil prices, all of which headed down this week, sparking some talk of a broader commodity price crash.

According to data from the Energy Information Administration, retail gasoline prices dropped to $3.93/gallon this week nationally, while a AAA survey showed gas prices even lower at $3.87. Average on-highway diesel prices ticked down another dime this week to $4.50/gallon after falling a dime last week. Of course, both are still up significantly from year-ago levels.

These fuel price numbers were released Monday by the Energy Department, ahead of crude oil’s somewhat significant decline to a three-month low on Tuesday, when light, sweet crude oil prices closed at $119.17/barrel on the New York Mercantile Exchange. That marked oil's lowest close since May 2, when prices settled at $116.32.

Some market analysts point to the decline in oil demand as the driver behind the shift in energy price trends. “With the trajectory of the U.S. and global economies, oil demand will continue to be negatively affected,” said Rachel Ziemba, an oil analyst with RGE Monitor in a CNN/Money report. Evan Claar, who runs hedge fund firm CBI Capital, tells the Wall Street Journal today that “a lot of money is clearly leaving the energy space, even though there's been only a modest drop in oil prices after a huge run-up.”

But others weren’t so sure the latest energy price trend is a sign of a significant market shift.  In an Associated Press report, Mike Fitzpatrick, vice president of energy and risk management at MF Global, said issues such as political tensions in Nigeria and the Middle East, the potential for a big hurricane along the Gulf Coast and global energy demand may rear up yet again to affect energy prices. “Even if it seems as though China's economic demand run has slowed some, those changes at the margins still make them a huge consumer of crude products,” Fitzpatrick tells the Associated Press.

And while there has been more debate of late about the impact of investors on commodity prices, investor involvement could work in a commodity buyer’s favor if investors get skittish in light of energy price declines and rush out of commodities markets altogether, causing commodity prices to nosedive.  “There is speculation that the commodity sector will continue to slip over the next few weeks,” says Joe Kinahan, chief derivatives strategist at online brokerage Thinkorswim in a Reuters report. “Many who have enjoyed great gains in this sector are buying puts as a protective measure.”

Mark Mobius of Templeton Asset Management in Singapore tells Bloomberg, “I'm not saying the long-term upward trend for commodities is going to come down. But you're going to see this overreaction, or the higher prices that we've seen recently that are beyond the trend, come back down again.”