Wednesday, 20 of June of 2018

Economics. Explained.  

Gasoline Prices

June 13, 2018

Gasoline prices at the retail level declined $0.03 in the week ending June 11 to 2.91 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.66. The Department of Energy expects national gasoline prices to average $2.77 this year.  They are projected to peak at $2.97 per gallon in June, but then decline to $2.75 by the end of the year. 

Spot prices for gasoline have been on a steady upswing for the past several  months.  However, talk about OPEC possible increasing its crude oil output has caused gasoline prices to decline about 7.5% since reaching a peak of $2.20 in late May.

Crude oil prices recently jumped to $72 per gallon.  However, as noted above, talk about an increase in crude oil output by OPEC nations has caused the price to decline 8.5% from a mid-May high of $72 per gallon to $66.The Energy Information Agency predicts that crude prices will average $64.53 in 2018.  If that is the case, oil prices should decline gradually in the second half of the year.

The number of oil rigs in service  However, the number of rigs in operation has  rebounded sharply in recent months to 1,062 thousand.  Thus,  higher crude oil prices are encouraging drillers to accelerate the pace of production.  If crude prices remain above $60 per barrel this year or higher, we should expect the number of oil rigs in operation, and production, to continue to climb.

Production in the past week surged to 10,900 thousand barrels per day and it continues to climb rapidly.  The Department of Energy expects production to average 10.8 million barrels this year and 11.8 million barrels in 2019.

To put those production levels in perspective, keep in mind that if U.S. crude oil production picks up as expected the U.S. will become the world’s largest oil producer by the end of this year.

How can the number of rigs rise slowly but production surge?  Easy.  Technology in the oil sector is increasing which allows producers to boost production while simultaneously shutting down wells.  A few years ago some frackers could not drill profitably unless crude oil prices were about $65 per barrel.  Today that number has declined to about $35 per barrel.  Six months from now that number will be lower still.

Oil inventories fell quickly for most of last year.    OPEC output was reduced at the same time that global demand picked up sharply.  While crude inventories have been sliding for a year, at 1,100 million barrels crude inventories are now roughly in line with the 2009-2014 average of 1,055 million barrels.  However, with demand continuing to slightly exceed supply for the next several months, stocks may well decline slightly further in the near term.

The International Energy Agency in Paris (IEA) produces some estimates of global demand and supply.  A couple of months ago its estimate had supply and demand relatively in balance between now and yearend.  But now,as shown in the chart below, demand picked up somewhat in recent months and while supply edged lower as production constraints have restrained output.  As a result the IEA now estimates that demand will exceed supply by about 0.2 million barrels per day between now and yearend. A significant portion of the recent production shortfall was unintentional.  The IEA noted “chronic mismanagement” in Venezuela has cut production there to a multi-decade low,and Iranian production could slip further as a result of the U.S. sanctions.

OPEC is expected to boost output somewhat at its meeting next week to counter the shortfall from Venezuela and Iran.  That would put demand in supply roughly in balance between now and yearend and allow the price of crude oil to decline somewhat.

Stephen Slifer


Charleston, SC*

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