Surplus oil driving prices back down

A year after the price of oil closed at an all-time high, prices are way down – and may fall significantly as supply continues to dwarf demand.

Downward pressure on oil prices is so great the commodity could trade for as little as $20 a barrel by the end of the year – less than one-third of what it traded for this week and an 86 percent drop from its peak last year, analysts said.

That could push gasoline prices back down to $2 a gallon, prices not seen since last autumn’s slide slammed retail gasoline to its lowest value in four years.

The reasons are simple, said Philip Verleger Jr., an expert on energy markets at the University of Calgary: The still-sputtering economy has lessened demand at a time when there is a big surplus of oil.

For eight straight months, oil supplies have been running about 2 million barrels a day higher than the global demand of 83 million barrels a day, Verleger said. Eventually, he and others predicted, suppliers will tire of paying to store all of the surplus oil and flood the market.

“That is the largest and longest continuous glut of supply that I have seen in 30 years of following energy prices. It’s a huge surplus. There has never been anything like it,” Verleger said.

The market eventually will correct itself, pushing prices down, Fadel Gheit, senior energy analyst for Oppenheimer and Co., wrote in a note to investors.

“Excessive speculation and a weak dollar have lifted oil prices to levels not sustainable by market fundamentals,” Gheit wrote.

With so much oil available and so little need for that amount, investors, oil companies and even some banks have bought and stored surplus oil everywhere they can. By one estimate, before oil surged to its high this year of $73.38 a barrel in June, as many as 67 supertankers – each capable of carrying 2 million barrels of oil – were being used as floating storage.

Verleger said it represented a largely risk-free investment for those who could sell that oil for huge profits on the futures markets.

But the glut has gone on for so long, he said, that the cost for all of that floating storage is bound to rise. When it rises enough, some will refuse to pay and a lot of that oil is going to be dumped onto the market.

“Oil will drop to $20 a barrel by the end of the year because this situation just cannot be sustained,” Verleger said.

Bob van der Valk, a fuel price analyst, predicted that oil would drop to $40 by the end of the year – and that Californians would be paying about $2 a gallon for regular gasoline.

“In normal years, you have seasonally adjusted pricing, and 2009 is looking like our first normal year since 2006,” van der Valk said. “By year’s end, oil and gasoline will be coming down.”