WASHINGTON — Oil prices declined nearly $6 a barrel on Tuesday on the news that the Gulf Coast region's energy infrastructure escaped serious damage from Hurricane Gustav, and analysts expected the trend of falling oil and gasoline prices to continue.
Oil prices for October delivery fell to as low as $105.46 in early trading — the lowest they've been since April — before settling down $5.75 Tuesday to $109.71 on the New York Mercantile Exchange. Having now crossed the psychological threshold of $110, prices seem headed toward $100 a barrel. Oil prices are almost 30 percent off their brief high of $147 a barrel in July.
The last time oil prices were under $100 a barrel, the week of March 14-20, the nationwide average price for a gallon of unleaded gasoline stood at $3.27. AAA said Tuesday that the nationwide average stood at $3.68, up 90 cents a gallon from a year ago.
For now, all signs point to lower prices.
"We see continued weak demand," said James Crandell, an oil analyst with Lehman Brothers, a Wall Street investment bank that has taken a contrarian stance in forecasting declining oil prices.
Lehman expects oil prices to average about $105 a barrel from October to December, then $100 a barrel or less at the start of 2009. The reason: Weakened demand in the U.S. now is being followed by weaker demand for oil in Asia and Europe.
"The European area has deteriorated and central bankers have changed their tone there," said Crandell, noting that inflation is no longer as problematic as slow growth in Europe, reducing demand for oil. "In terms of oil demand, we see continued weakness in the United States, which has not gotten better as prices went down."
Another factor, albeit one that's harder to quantify, is weakening demand for oil and its refined products in China. Chinese consumption statistics have long been viewed as being insufficiently transparent. Oil analysts also believe China was building gasoline and diesel-fuel inventories ahead of the Beijing Summer Olympics last month, reportedly to ensure backup supplies in the event of any major failures along its power grid.
"It's pretty clear that they were building up stockpiles ... not only will they not be building stockpiles but they will be de-stocking," Crandell said, meaning the Chinese will be drawing down from their existing oil inventories rather than sucking oil off a tight global market.
Other oil analysts believe falling oil prices reflect a correction in what was a speculative bubble, and suggest even lower prices are ahead.
"Despite the recent correction, we believe that crude oil prices are still inflated and do not reflect industry fundamentals," wrote Fadel Gheit and Daniel Katzenberg, oil analysts for Oppenheimer & Co., a New York investment-management firm.
In a research note Tuesday, the two suggested that recent hostilities in the oil-rich Caspian region should have reversed slumping prices if global supplies really were drum tight.
"The Russian invasion of Georgia and Hurricane Gustav have failed to stem the slide in oil prices, which proves to us that oil prices are inflated," Gheit and Katzenberg said, adding that "barring a major supply disruption, we think oil prices have already peaked."
The 11-member Organization of Petroleum Exporting Countries is unlikely to watch prices sink too much further, however. OPEC members meet next Tuesday and some such as Iran have signaled they're willing to withhold supply to support higher prices.
MORE FROM MCCLATCHY