Are Gas Prices Starting to Stabilize?
Today's Wall Street Journal reports that gas prices may have bottomed, though price increases may be weeks or months away. In recent weeks demand for gas has risen slightly, and crude oil prices have risen slightly – to just under $40 per barrel.
The most significant event, though, seems to be that OPEC has reduced production by 2.2 million barrels of oil per day. Back in the fall of 2008, gasoline demand fell precipitously and OPEC couldn’t reduce supply fast enough to prevent the rapid downward spiral we’ve seen since then.
Energy Information Administration data shows that average retail gas prices were over $4.00 in June and July of 2008, but fell below $3.00 by October and below $2.00 in November.
Because the economic recession plays such a big role in this softening of demand, analysts don’t expect significant price increases until an economic recovery is underway. That assessment is reinforced by soft consumer demand around the globe.
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Russ Bellinis
I think the answer is "Maybe." I don't see prices rising in the near term, unless the U.S. economy makes some sort of miraculous recovery, followed closely by the rest of the world's economies. Oil prices may not have finished falling, however. When there is a price drop caused by reduced demand, OPEC reduces production. However, many of the OPEC countries are "addicted" to oil dollars, and they can't afford long term reductions in income resulting from the reduced production levels combined with lower price per barrel. If the recession lasts as long as has been predicted, expect some OPEC countries to increase production in ordeer to get their "oil dollar fix." If there is a significant increase in oil production by OPEC without an increased demand, I would expect to see oil prices drop further.
When it gets to where the "lion's share" of the cost of gas (may be there already) is in the refining costs rather than the purchase of crude oil, then gas prices will probably not drop further.
chartguy
There's a massive overhang of supply, especially in the North American market. The financial engineers came up with all sorts of instruments to let institutional investors buy commodities. The Goldman Sachs Commodity Index is the commodity index with the most weight in energy. Calpers, the largest pension fund in the country, put 3% of their investments into commodities, and a lot of that was in GSCI swaps. That kind of "investment" drove up the price of oil.
Today, we have so much supply (ramped up because of the former high price) that oil companies are leasing tankers, filling them with crude, and storing it at anchor (they profit from the fact that prices on contracts for future delivery are higher than cash prices). West Texas Intermediate is a better quality of oil (lighter, sweeter) than Brent, but there's so much that it's trading at a discount to Brent. What that says to me is that it will be at least five years, and probably ten before we see $100/bbl. oil again. There are massive inventories, and a lot of supply that becomes economical at higher prices is available now.
That said, over the next couple of months, I would expect a minor spike. Every spring they switch over to summer grade, and upgrade some refineries while they're switching. There's almost always an accident. Some refinery somewhere catches fire, has an explosion, etc. That usually happens around the end of April, and the price pops up for about two months.
Russ Bellinis
I think the "spike" will only come if there is sufficient demand to sustain a spike. If driving does not increase, and especially if there is a decrease in the demand for heating oil due to an early onset of warmer weather in the North ( don't know if it will happen, and I haven't seen evidence that the weather guessers can reliably predict tomorrow's weather let alone what it will do 3 months out), I doubt that we will see the spike. If we do, it may spike for a day or two and then drop back down when no one buys gas. I also have not seen any figures on the number of trucking companies that may go out of business. The news has been focused on large corporations that are in financial trouble. Most trucking companies are relatively small operations. Will we suddenly see fewer trucks on the road? At 3-4 mpg on diesel, how much extra inventory will the oil companies be stuck with if the transportation industry cuts back?
Mac-ster
Hey, Chartguy knows what is going on. Amazing more people don't know. It seems like the speculative oil market is messing things up. Robin Hood in reverse. I say destroy the speculative oil market, and stabilize prices at the pump with tax. Use the tax money to reduce the deficit which improves the value of the dollar, and strengthens our global position again. There are a few filthy rich guys that will not be getting richer off our gas prices, but I'm not concerned about them. Of course I am not an economist so there maybe a flaw in my proposal. But it has been a long time since understanding economics was a requirement for controlling the US economy. I really hope the new team puts stupidity out of fashion again.
Ducati Minor
All I know is that I'm paying more and more per gallon (not bad at all) when the price for a barrel has been dropping like a stone in a pond.
chartguy
Ducati,
Here in Colorado, it seems to be about a two-week lag between movement in the price of crude oil and the price of gasoline. If WTI spikes in NY, gas will spike here about two weeks later. If Russ is right, and diesel truck miles are dropping faster than gas miles, it might also have an effect. Refineries are set up to produce a specific proportion of diesel to gasoline. They can vary it, but they try to operate at their sweet spot (where they get the most product out for the least crude going in), and changing the ratio is not a minor adjustment. Anyway, if diesel demand drops faster than gas demand, it can actually put upward pressure on gas prices (temporarily), because the refiners are not eager to produce more unwanted diesel in order to produce more gasoline.
I filled up today on regular, at $1.76/gal. (cash). WTI Crude was $38.94.During most of the last forty years, $40 was the ceiling for crude oil prices, but we saw gas prices higher than $1.76. So, I'd say that gas is just about where it should be, relative to crude oil. If crude were $30/bbl., I'd expect to pay less for gas.
Brent was $40.91, so the inverted spread is narrowing. I would not expect it to remain that way long. WTI will trade above Brent soon.
Autosavant
Gas prices are LITERALLY DIRT CHEAP again, and coming down further, not stabilizing, the last few days.
Hopefully consumers will NOT be fooled that it is OK again to drive Ugly POS 9 MPG SUVs 100 miles to work every day.
If they do, all of us will pay the price, a much heavier price ($5-and even $10 gas) a few years down the road.
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