Thursday, 19 of April of 2018

Economics. Explained.  

Gasoline Prices

April 18, 2018

Gasoline prices at the retail level rsoe $0.05 ending April 16 to $2.75. In the low country of South Carolina gasoline prices tend to about $0.25 below the national average or about $2.50. The Department of Energy expects national gasoline prices to average $2.64 this year which is somewhat lower than they are currently.  Hence, prices should decline somewhat in the months ahead.  However, the DOE has been expecting prices to fall for some time and, as prices steadily rise, it simply keeps boosting its projected average price for the year.  Thus, its forecasts for a decline later this year becomes questionable.

Spot prices for gasoline have been on the rise, although not in a straight line manner, for the past several months.  So while pump prices may fall later in the year, they are not going to fall any time soon.

Crude oil prices are currently about $68.00.  The Energy Information Agency predicts that crude prices will average $59.37 in 2018.  Thus, crude prices should decline significantly in the months ahead.  However, as noted earlier, the DOE has been surprised and its average gas price for the year has been steadily revised higher.  It appears that demand for crude continues to outpace supply.  See the discussion below about global supply/demand estimates.

The number of oil rigs in service  However, the number of rigs in operation has  rebounded sharply in recent months to 1,008 thousand.  Thus,  higher crude oil prices are encouraging some drillers to accelerate the pace of production.  If crude prices average about $59 per barrel this year or higher, we should expect the number of oil rigs in operation to continue to climb and further boost production.

Production in the past month surged to 10,540 thousand barrels per day which continues to climb rapidly.  The Department of Energy expects production to average 10.7 million barrels this year and 11.4 million barrels in 2019.  As U.S. production continues to rise, crude prices should decline to about $58 per barrel.

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 about $48 per barrel.  Six months from now that number will be lower still.

Oil inventories fell quickly for most of last year.    OPEC output has been reduced at the same time that global demand has picked up sharply.  While crude inventories have been sliding for a year, at 1.093 million barrels crude inventories are now roughly in line with the 2009-2014 average of 1,055 million barrels.  However, demand continuing to slightly exceed supply for the next several months, stocks may well continue to decline 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 0.5 million barrels per day between now and yearend.  If its forecasts are correct it is likely the DOE’s forecast for lower crude and gas prices between now and yearend may not materialize.  We’ll see.

Stephen Slifer


Charleston, SC*

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