Oil headed for biggest monthly drop since 2008


THE price of oil is headed for its biggest monthly decline since December 2008.

Oil has dropped more than 16 percent so far in May, erasing all of its gains for the year. That's helped lower gas prices and provided a little financial relief to cautious consumers.

Prices are falling on expectations that the world won't use as much oil this year as previously expected. Europe's financial crisis is the most immediate concern, but there have been plenty of signs of weaker demand. Benchmark US crude fell US$2.94, or 3.2 percent, yesterday to finish at US$87.82 on the New York Mercantile Exchange. It's now down 11 percent from Jan. 1.

Earlier this year, oil rose near US$110 per barrel because of the potential for conflict between Iran and the West. Those tensions have eased somewhat, and the market's focus has turned to weak spots in the global economy.

The month started with so-so US jobs numbers. Other US economic data have been mixed and gasoline consumption has dropped for 62 straight weeks. Meanwhile, China's manufacturing sector is slowing down. The US and China are the biggest oil consumers in the world.

Earlier this year, energy economists mostly agreed that world oil demand would hit a new record in 2012, probably around 89 million barrels per day. But with demand not growing in China and declining in the US, those expectations are starting to change.

"I wouldn't be surprised if demand was lower this year," said Michael Lynch, president of Strategic Energy & Economic Research.

That could be the case in Europe. Experts worry the 17 nations that use the euro will fall into recession. Europe consumes about 16 percent of the world's oil.

Fears about Europe's financial stability sent ripples through world markets yesterday. Major stock indexes slipped 1 percent to 2 percent. The European Commission fanned those concerns by reporting that economic confidence has plummeted this month to the lowest level in two and a half years.

The euro fell near a two-year low against the dollar, helping to push oil prices even lower. Oil, which is priced in dollars, tends to fall as the dollar rises and makes crude barrels more expensive for investors holding foreign money. Brent crude, which is used to price oil varieties that are imported into the US, fell by US$3.21 to end at US$103.47 per barrel in London.

Traders have seen this show before. This is the third consecutive May where oil has plunged, in part because of similar concerns about European debts. Oil fell 9.9 percent in May of last year and 14.1 percent in May 2010. Jim Ritterbusch, an independent oil trader and analyst, said it's a coincidence that the month has become known for tumbling oil prices.

A number of one-time factors moved oil prices over the past few years, he said, including last year's Libyan rebellion, the 2011 release of emergency oil supplies by the US and other industrialized countries, fighting in Nigeria and fears over Iran's nuclear program. In the past two years, oil recovered from its swoon in May and ended the year higher than it started.

"Who knows, maybe that will happen again this year," Ritterbusch said.

Drivers hope not. A gallon of regular unleaded has dropped by 31 cents since peaking in the first week of April.

US retail gasoline prices fell by a penny yesterday to US$3.626 per gallon (95 cents a liter), according to auto club AAA, Wright Express and Oil Price Information Service. Experts see gas falling to at least US$3.50 by July 4.

Drivers aren't rushing to use more of the cheaper gasoline, however. MasterCard SpendingPulse said that motorists bought less gasoline last week, even though it cost about 13 cents per gallon less than in the same week last year. People are driving fewer miles and getting around in more fuel-efficient cars. And gas is still 90 cents more expensive than at this time in 2010.

Other futures prices also declined yesterday.



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