Oil prices continue fall as reality catches up with supply and demand

Prices for oil and gasoline, after stubbornly shrugging off recession concerns and pinching pocketbooks this year, have fallen more than 10 percent from their June peaks. Crude prices are now under $63 per barrel, more than $10 off a week earlier. Gasoline prices on the NYMEX have fallen more than 25 cents per gallon after briefly rising above $2.

Two energy analysts last month told DailyFinance that the energy markets are fundamentally very weak, but that concerns about the value of the dollar were pushing prices up. The dollar has held mostly steady since mid-June, and the halt in its decline has taken the wind out of the energy bulls' sails. Inventories continued to grow even entering the supposedly heavy demand period from summer vacationers, and AAA estimated that the weak economy would dampen July 4th holiday travel by about two percent from last year. The Department of Energy estimates that liquid petroleum use will be down more than three percent this year.

Many market observers believe that OPEC member nations have been cheating on their stated production quotas to capture extra revenues as prices have risen. Kuwaiti Oil Minister Sheikh Ahmed al-Abdullah al-Sabah implies that he favors oil prices in a range of $60 to $100 per barrel, according to Bloomberg. Lower prices would hurt economies depending on the revenue of oil production; higher prices would hurt the global economy.

In addition to slightly higher expected output from OPEC, energy company ConocoPhillips (COP) reported that its production in the second quarter was up compared to last year, at about 1.86 million barrels of oil equivalent per day. But far lower prices for oil and natural gas will hurt ConocoPhillips profits. The consensus analyst estimate for Conoco's second quarter earnings is $0.78 per share, compared to $3.49 per share in the same quarter of 2008.

The beneficiary of lower energy prices is U.S. consumers, still scarred by the shock of last summer's $150-per-barrel oil and $4-per-gallon gasoline prices. The nation's current savings from lower gas prices, compared to last year's peak, amounts to roughly $600 million a day -- or $215 billion annually -- according to calculations from Michigan State economist Mark J. Perry.

James Cullen also edits and writes at CollegeAnalysts.com.

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