Wednesday, 15 of August of 2018

Economics. Explained.  

Gasoline Prices

August 8, 2018

Gasoline prices at the retail level were unchanged in the week ending August 6 at $2.85 per gallon.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $2.60. The Department of Energy expects national gasoline prices to average $2.76 this year.  They are projected to peak right about now and then decline to $2.65 by the end of the year. 

Spot prices for gasoline had been on a steady upswing for the past several  months.  However, spot prices should soon begin to fall if crude prices begin to decline, which should translate into slightly lower pump prices in the weeks ahead.

Crude oil prices recently jumped to $74 per gallon.  The peak price occurred instantly after Trump announced sanctions on Iranian oil exports.  However, crude prices plunged about $5.00 per barrel the past couple of weeks in response to several factors —  talk about OPEC and Russia increasing their crude oil output, an increase in production in the U.S. in the most recent week, a potential tapping of the Strategic Petroleum Reserve later this year, and the possibility of slower global growth as trade flows subside in response to escalating tariffs.  The Energy Information Agency predicts that crude prices will average $64.53 in 2018.  If that is the case, oil prices should continue to decline gradually in the second half of the year.

The number of oil rigs in  operation has  rebounded sharply in recent months to 1,059 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 has surged to 10,900 thousand barrels per day.  The Department of Energy expects production to average 10.8 million barrels this year but climb further to 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 1,071 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. The IEA noted that Venezuela has cut production there to a multi-decade low ,and now there is the prospect of further a reduction in global oil supply by yearend stemming from curtailment of Iranian oil exports.

OPEC has chosen to boost output somewhat to counter the shortfall from Venezuela and Iran.  At the same time U.S. production should continue to climb.  And oil demand might shrink if global GDP growth slows in response to the imposition of higher tariffs on imported goods around the world.  That would put demand and supply roughly in balance between now and yearend and allow the price of crude oil to decline somewhat.

Stephen Slifer

NumberNomics

Charleston, SC*


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