Oil plunges, erasing 2011 gains; gasoline prices ease [Updated]
Oil prices fell to their lowest levels since February, erasing the year's gains for the commodity, amid rising concerns that the U.S. economy is slowing.
The U.S. benchmark for crude oil trading -- West Texas Intermediate -- was down $4.19, or 4.6%, to $87.74 a barrel in midday trading on the New York Mercantile Exchange. Earlier in the day, the price dropped as low as $87.25, the lowest since Feb. 22. That was down sharply from the year's trading day high so far of $114.83 a barrel reached on May 2.
"It's a combination of things. You've got the dollar rallying. You've got banks talking about charging customers for making deposits because their model is broken. The yield environment is so low that it's going to cost them to take deposits. I thought we were starting to turn the corner but there are real fears now about a second recession," said John Kilduff, founding partner at Again Capital, an energy hedge fund in New York.
The Bank of New York is charging some of its institutional customers a fee to hold their cash. Most of its customers are large pension funds and money market funds. It does not deal directly with consumers.
The European benchmark for crude, Brent North Sea, fell $3.66 to $109.57 a barrel on the ICE Futures Exchange in London.
Some positive news about the economy would be required to shore up confidence, but all eyes were now on the next set of unemployment numbers and what they will show, Kilduff said, adding, "The fear is that they are going to show zero job growth."
The stock market was also plunging. Phil Flynn, an analyst with PFGBest Research in Chicago, said, "Investors are fleeing to cash. The mood of this market is very bad. It all looks ugly at the moment."
On a positive note, oil's decline seemed to have stopped the recent upswing in retail gasoline prices. In California, the average price of a gallon of regular was $3.815, down 0.2 cents from last week, according to the AAA Fuel Gauge Report.
The gain in prices around the U.S. has also stalled, at least for the moment. The national average for a gallon of regular was $3.703, down from $3.706 last week. The AAA's average come from data compiled by the Oil Price Information Service and by Wright Express.
California, a state that is normally very tight on supplies of refined fuels, was in the rare position of having more than it needed to meet its declining demand levels, according to Bob van der Valk, a fuel price analyst. There seemed to be few options for moving it around to places of higher demand, he said.
"The West Coast has an oversupply of gasoline and has problems obtaining tanker ships to move product around to the East Coast," Van der Valk said.
[Updated 12:27 p.m. pdt, 8/04/11: U.S. crude for September delivery settled at $86.63 a barrel on the New York Mercantile Exchange, sliding $5.30, or nearly 5.8%, after hitting $86.04 during the trading day, the lowest midday point since the Feb. 18.]
-- Ronald D. White
Chart: The AAA's rolling 12-month average for regular gasoline prices in California and nationally. Credit: AAA Fuel Gauge Report