Oil prices drop below $86 per barrel

Federal Reserve stimulus plan gets mixed reviews

9/21/2011

NEW YORK — Oil dropped Wednesday as the Federal Reserve announced a new stimulus plan that some analysts said would not do enough to spark the economy and boost demand for oil and gas.

The Fed’s latest remedy for the economy focuses on rebalancing its $2.87 trillion portfolio to lower Treasury yields and potentially reduce rates on mortgages and other loans. Analysts said it falls short of last year’s $600 billion bond-buying program that ended this year.

Benchmark crude gave up $1 to finish at $85.92 per barrel in New York. Oil recovered some earlier losses after the Fed announcement, but prices were still lower at the end of the day. Brent crude, used to price crude from foreign countries, fell 18 cents to finish at $110.36 in London.

The economy has slowed this year, growing at an annual rate of just 0.7 percent. Consumer spending has been stagnant and the unemployment rate remains high. Other nations are also struggling to grow, and economists have cut back their expectations for global oil demand this year.

“The market is saying, ‘Thank you very much Ben Bernanke,’ but it’s not enough to get our banks out of trouble,” PFGBest analyst Phil Flynn said.

Oil prices fell Wednesday even though U.S. supplies dropped more than expected last week. The Energy Information Administration said the nation’s oil inventories shrank by 7.3 million barrels. Analysts surveyed by Platts, the energy information arm of McGraw Hill Cos., expected a decline of only 1 million barrels.

Supplies have declined since Tropical Storm Lee battered oil platforms along the Gulf Coast earlier this month. Oil companies were forced to evacuate workers and shut down daily production by as much as 900,000 barrels per day. Those platforms are back online, but the slowdown in production continues to hurt U.S. supplies.

The drop in supplies shouldn’t be taken as a sign that the economy needs more oil, said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service: “The global market isn’t really tightening.”

The government report said that demand in the U.S. for gasoline and other petroleum products declined last week, when compared to the same time last year. Gasoline supplies grew more than expected, the EIA said, increasing by 3.3 million barrels last week.

At the pump, gasoline prices dropped by a penny to a national average of $3.57 per gallon, according to AAA, Wright Express and Oil Price Information Service. A gallon of regular peaked this year near $4 per gallon in May. But the decline since then has been uneven across the country. Gasoline is 50 cents per gallon cheaper in some Midwest states and the Southeast than it is in major cities on the east and west coasts.

In other energy trading, heating oil dropped 2.74 cents to end at $2.9342 per gallon, while gasoline futures lost 3.49 cents to finish at $2.6665 per gallon. Natural gas fell 6.8 cents to end at $3.73 per 1,000 cubic feet.