WASHINGTON — Oil futures climbed Thursday from the biggest drop of the year, but experts remain pessimistic longer term about the energy outlook.
Oil futures increased as much as 1.5% after crude oil plunged $4.27, or 4.8%, on Wednesday — the biggest slide since Dec. 14 — after President Barack Obama won re-election and the Congress remained divided. Read our report on the oil sector.
The slight rebound is in line with normal market movement, even though the fiscal cliff is still “hanging over the entire market, not just the oil market,” and there’s still a major concern about the government’s ability in saving the country from going off the cliff, said Rayola Dougher, a senior economic adviser for the American Petroleum Institute.
“The expectation is that the economic growth is just not robust as everybody hoped it would be, not just in the United States, Europe and in Asia too,” she said. “We’re looking at slower economic growth and supplies that are adequate right now, and that’s primarily moving the market in recent weeks toward the downward price.”
Juan Pablo Fuentes, an economist from Moody’s Analytics, said investors’ fear of the coming battle in Congress over budget cuts and tax increases will result in a slower economic growth and thus impact the oil market.
“Basically what the market is seeing is a difficulty in reaching an agreement on the fiscal situation with the divided Congress and the status quo,” Fuentes said.
Meanwhile, Jack Gerard, CEO and president of the American Petroleum Institute, urged the new Congress to grant the oil and gas industry a favorable tax policy so they could stimulate the market and restore economic growth.
“You can’t expect companies to invest billions of dollar in the United States to produce oil and natural gas by raising the cost and increasing their taxes,” Gerard said. “You just can’t have it both ways.”
Gerard also said the federal government could generate revenues in a variety of ways, not just from taxes.
“Oil and natural gas industry is the major contributor to revenue of the federal government, over $86 billion a day,” he said. “We can actually increase it and expand it, but not by tax treatments.”
Dougher said the market should see some improvement once the budget issue is resolved, as investors will gain more optimism.
“Some of what’s going into the price is the expectation rather than a real knowledge of what will happen,” she said. “If we can get beyond this, that will be a plus to all commodities in the marketplace. We’re surely looking for Congress to really get back to work and truly address it this time around.”
Fuentes also said he believed that the country needs to come up with a way to stimulate oil demand in order to see a surge in prices.
“What’s driving the prices down is the demand side, and the market anticipates that these conditions might prevail next year,” he said. “What we’ve seen in this year and recent years is a strong increase of supply in the U.S., and that has also been an effect on keeping the prices low this year, especially I would say in the last few months.”
Despite the Greek debt crisis and slower economic growth in Asia dragging down the U.S. oil market, there’s still some hope from other strong economic bodies, said Chris Faulkner, CEO of Breitling Oil and Gas.
“You still got Latin America, you still got India, you got China,” he said. “They’re huge demand drivers for oil.”
Despite a colder winter that will favor the energy market, Fuentes of Moody’s said, both oil and natural gas prices will remain low.
“You can see these seasonality factors get up in the winter, but that will only be temporary. That wouldn’t change the fundamentals for natural gas and for oil,” he said.