The Outlook for Oil & Recovery Efforts With A.G. Edwards' Bill O'Grady
Friday, September 09, 2005SUSIE GHARIB: Oil prices dropped again today. In New York trading, they closed off $1.59 to $64.37. In Washington, the Federal Energy Information Administration slashed its forecast for growth in U.S. oil demand this year and next saying it`s due to a huge jump in energy prices. A short while ago I talked with AG Edwards` futures analyst Bill O`Grady and began by asking him what was behind today`s oil price drop.
BILL O`GRADY, FUTURES ANALYST, A.G. EDWARDS: There are a couple of factors that are very important to keep in mind about the aftermath of that spike. The first is that the month of September tends to be a weak demand month. Seasonably gasoline consumption falls anywhere from 300,000 to a half million barrels a day just naturally. Once we get passed the last summer holiday and the children back at school, vacations tend to slow down and you see a drop in consumption. So that was going to have a dampening effect on gasoline consumption regardless of whether or not we had a hurricane. For that reason we were looking for a pull back in prices in the month of September. In addition, the International Energy Agency in a very unusual move because of Katrina authorized a global release of strategic reserves of crude oil, gasoline and distillate fuels to the tune of two million barrels a day for 30 days, a total of 60 million barrels. So we have the combination of falling consumption due to seasonal factors coupled with secure supply from the strategic petroleum reserves of the United States, Europe and Japan.
GHARIB: And also the government today reduced its forecast on oil demand, so between the factors you were mentioning a long term demand, where do you see oil prices going. Are they going to get down to $50, $60 a barrel?
O`GRADY: We`re looking for a $50 handle, somewhere between $59-$50 over the next four to six weeks. Again, this weaker demand will play an important role in doing that. The problem that you have once you get past that middle of October issue is that you start heading into winter. And we move into heating oil season and a lot of significant part of the price of crude oil is going to be determined by weather. Since predicting long term weather -- predicting what the winter`s going to be like in September is a difficult affair. We tend to pass on that.
GHARIB: What about prices at the pump? You know everybody is grumbling about these $5, $4 a barrel a gallon gasoline. Will we see a drop at the pump?
O`GRADY: Yeah, we should start to see that I would expect in the coming five to 10 days. Again, it takes a little while for it to work itself through the system. But you`ll start to see wholesale prices fall. We have already seen a pretty significant drop in gasoline prices both at the futures level and the wholesale level and you`ll start to see that showing up at the pump, my suspicion is by the weekend.
GHARIB: Can you say the same thing will be true of jet fuel prices because late today, Northwest Airlines said that it`s going to be canceling its nonstop flights between New York and Tokyo because of high jet fuel prices?
O`GRADY: Those jet fuel prices will also come off to some extent maybe not as much as the gasoline does, because it didn`t have quite the same run up and we aren`t seeing a strategic release of jet fuel. But as crude oil prices fall, we should see those jet fuel prices ease as well.
GHARIB: Bill, we`re expecting the Energy Department to do its weekly oil inventory report. What are you expecting them to say?
O`GRADY: Well this coming week is - we`re going to see some significant withdrawals from storage. I`m looking for somewhere between 6.5 to 7.5 million barrels of crude oil withdrawn from storage this week. It`s really a function of the drop in production due to hurricane Katrina, also the loss of imports. Keep in mind that when Katrina went through, it shut off the Louisiana offshore oil port. And so that will curtail imports and production. Offsetting that, of course, is that we also lost some refining capacity so that oil won`t be consumed. So my guess comes out to about 6.5 to 7 million barrels a day, which is fairly consistent with what we saw with Ivan last year.
GHARIB: OK, we`re going to have to leave it there, Bill, thank you so much as always, a pleasure talking to you. O`GRADY: You`re welcome.
