How will oil prices following the surplus affect gasoline prices?
We’re almost a month into the year and the question stands: what are gas prices going to look like in the coming year? Given the recent oil surplus and economic uncertainty, predictions are all over the board. We have a yearly average of $2.47 predicted by the U.S. Energy Information Administration and $2.70 prediction from GasBuddy. That’s quite a difference.
What makes gas prices so hard to nail down?
Remember our last Oil Check, when we covered the lead up to the OPEC Plus meeting and the impact their decision would have on the oil market? Well that meeting, which concluded on December 7, ended with the members promising to curb oil production. The intention was to limit the supply to raise the price of oil.
To put this in context, currently shale oil is at about $52 per barrel. Brent crude is hovering around $61 per barrel. A year ago, these oil prices were at $64 and $71 respectively. It’s a sensible move: less supply means higher demand which drives higher prices and thus higher profits. But getting prices to where OPEC wants them will take time. In 2017 there was a global surplus and OPEC made a deal with Russia, it took half a year for them to see the oil prices they wanted. Not to mention, there are a number of factors that could prevent that from becoming reality. Let’s start with the issues of supply:
IEA pointed out that, while Saudi Arabia is dedicated to curbing production to see those higher profits, Russia may not seem as compelled. They were, and remain, an unpredictable player to watch in the months to come. There is potential for unpredictable behavior from Venezuela and Iran that could also disrupt OPEC+’s progress towards rebalancing the global oil market.
U.S. production is at an all-time high. What’s more, the U.S. has built up gasoline stocks so it can continue to offset production cuts.
A counter argument here is that low prices are not encouraging shale oil producers in the U.S. to increase production. There has been talk of new pipelines that can increase capability, but recent news suggests that there may be delays in starting these projects. The U.S. may be producing more oil than it ever has, but prices need to get higher if the industry is to grow.
Weather Has its Way
Due to EPA regulations, gasoline used in summer is formulated using a more expensive blend of additives. Winter gasoline, on the other hand, contains a less expensive blend of additives. As part of this seasonal gasoline transition, refineries need to stop running and retool for the different blend. Generally, refineries go offline in Mid Spring to change for the summer blend. Once the summer blend is in production, there is a price peak in spring, mostly due to the cost to produce the higher ethanol blend. The cycle continues with prices going down in fall and winter as adjustments are made to produce the less expensive winter blend of gasoline.
But the cyclical nature can be disrupted by weather events. Most notably, the damages Hurricane Harvey incurred on the oil and gas industry of the gulf required refineries stay online much later than usual to make up for lost production. With weather being about as predictable as the oil market, there’s no guarantee we won’t see similar disruption in the coming year.
Remember the vouchers the Trump administration offered to companies importing Iranian oil? You know, the ones that caused the whole oil market oversupply? Those are set to expire in May. If the US does not extend these again, the market may experience a shock again, lowering the amount available and increasing prices.
Fighting in the Middle East could cause production disruption. Oil fields in Libya were recently under assault as rival powers struggle for control of the valuable export. This tactic has been seen in Syria, Nigeria and a number of other regions, making predictability for oil prices even more difficult.
Decrease in Demand
But softening demand is also an issue. Oil consumption tracks with economic growth. And economic expansion in 2019 might be softer than previously anticipated:
-The International Monetary Fund recently revised its global growth forecast to 3.5% from 3.7%. Contributing factors include the U.S. and China trade war, Brexit uncertainties and China’s slowdown.
-China didn’t have great growth 2018. How bad was it? Apparently, the worst in almost three decades.
-Only 37% of CEOs in North America project global economic growth in 2019, nearly half of 63% projected for 2019, according to the latest PwC survey.
-Uncertainty grows in the U.S. as the partial government shutdown continues. The shutdown has stalled the approval of new loans, initial public offerings, the processing of tax documents and the approval of new products such as prescription drugs, among other effects. Additionally, staffing for IPOs of businesses going public has been limited and the stock market, which usually weathers shutdowns unfazed, may see negative impacts.
What does all of this mean for gas prices?
If the above information doesn’t reflect all the factors that contribute to the price of gas, I don’t know what could. It all spells uncertainty. If OPEC and other oil producing countries succeed in reducing production, gas prices will eventually stabilize. But for that to happen, a good number of other “if”s need to happen as hoped.
Understanding the impact of oil market volatility provides insight into how your company and mobile workforce will be impacted. If you’re interested in keeping in the know, check out our 2019 Fuel Trends Report.