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Oil reaches a 2011 low; gasoline prices should fall

August 8, 2011 |  9:28 am

Oil prices have hit new lows for the year following Standard & Poor's downgrade of the U.S. credit rating, but analysts said that there was little good news in the commodity's decline. They likened the situation to an obese man who is finally losing weight, but dropping the pounds because of a serious illness and not because of something positive like increased exercise.

CA_grph "The lower prices in this situation are a very ominous sign. Oil is crashing because there is less demand for it. There haven't been any really good economic signs that we can attribute to this," said Fadel Gheit, senior energy analyst for Oppenheimer and Co. in New York. Gheit added that the commodity soared this past spring, in part, because it was being driven by market speculators and not because of real demand and supply fundamentals. "It was another bubble," Gheit said.

U.S. benchmark West Texas Intermediate crude lost an additional $3.33 a barrel to $83.55 during trading on the New York Mercantile Exchange. That broke the previous low for the year of $84.32 a barrel in February. In London, European benchmark Brent North Sea crude fell $3.40 to $105.97 per barrel on the ICE Futures exchange.

Last week, Standard & Poor's lowered its rating for U.S. debt one notch from AAA to AA+.

John Kilduff, founding partner of Again Capital in New York, said that hopes for a much stronger economy in the second half of the year are diminishing. Kilduff added that there was a silver lining of sorts--retail gasoline prices should soon drop substantially.

Retail gasoline prices were already on the decline again. Nationally, the average price of a gallon of regular gasoline fell to $3.663, from $3.705 last week, according to the AAA Fuel Gauge Report, which uses data compiled by the Oil Price Information Service and Wright Express.

In California, the average price of a gallon of regular gasoline reached $3.79, down from $3.816 a week earlier. It was one of the lowest spreads ever between the national and California averages. California prices are normally as much as 50 cents a gallon or more higher than the rest of the nation because its fuel blend is more expensive.

Tom Kloza, chief oil analyst for the Oil Price Information Service, said that the state's prices could be headed as low as $3.25 to $3.30 a gallon at some of the cheaper retail outlets. Kloza said that the price for CARBOB, the acronym for the state's expensive and awkwardly named "California Reformulated Gasoline Blendstock for Oxygenate Blending" fuel, had dropped from $2.90 a gallon in the past two weeks to $2.65 a gallon today. Normally, about 60 cents is added to the price for the finished fuel, he said.

"California is going to be looking at price relief at the pump," Kloza said. But like Gheit, he said that it was more of a sign of a weakening economy and very low demand. "It's kind of like getting a reduced price for Dodger tickets at a time when the team is kind of awful."

--Ronald D. White

 The graphic is the AAA's roiling 12-month average for regular gasoline prices.

Related: Stocks tumble as markets absorb U.S. downgrade.

Related: U.S. unlikely to get back AAA rating soon.