Back under $3 Gallon, where’s Gasoline Headed?
June 15, 2018,
The national average price for regular grade gasoline sold at retail outlets across the United States topped the psychologically potent $3 gallon on Memorial Day, and stayed there for another week before again sliding under the round number benchmark, according to the weekly price survey from the Energy Information Administration.
It was a long hiatus for politically sensitive $3 gallon gasoline, which last averaged nationally above the price point in November 2014, as oil prices were on a steep descent from more than $100 bbl five months earlier before eventually bottoming out during the first quarter 2016. Crude prices have yet to again breach $100 bbl, with Brent crude, the international price marker, reaching an $80.50 bbl high in mid-May, and the U.S. price benchmark West Texas Intermediate topping out at $72.83 bbl a few days later.
Gasoline futures, which trade on the New York Mercantile Exchange under the acronym for Reformulated Blendstock for Oxygenate Blending, rallied to $2.2855 gallon on May 22, a price point last achieved in October 2014. Gasoline demand has been strong in 2018, but the key driver in lifting the RBOB futures contract to the multiyear high was spiking crude costs spurred on by multiple factors, chief among them geopolitical tension. Those tensions remain, putting a floor under crude prices.
It’s been a busy second quarter of news, events and developments affecting oil prices, including the rebalancing of the global oil market following more than three years of oversupply. The supply glut, drained primarily by production cuts from the Organization of the Petroleum Exporting Countries and 10 non-OPEC oil producing countries led by Russia along with strong global demand for oil, cushioned the market against supply disruptions or even the threat of lost supply. With the cushion gone price volatility in crude trading has returned, establishing fertile ground for sharp price advances.
U.S. President Donald Trump’s decision in early May to withdraw the United States from the Joint Comprehensive Plan of Action, more commonly known as the Iranian nuclear accord, was the chief catalyst in crude oil’s move to the May highs, as the market fears lost Iranian crude exports amid U.S. sanctions would sharply tighten the world’s supply-demand disposition. During prior sanctions from 2012 through 2015, Iranian oil exports dropped 1.2 million bpd.
Another OPEC member discussed less frequently but having a big effect on the oil market currently is Venezuela, where an economic collapse amid a growing dictatorship is having a severe impact on the country’s oil sector. Venezuelan crude production, which averaged 2.375 million bpd in 2015, has consistently declined for months, reaching 1.392 million bpd in May, and seen sliding below 1.0 million bpd later this year.
Crude prices fell hard from their May highs on news Saudi Arabia and Russia were discussing increasing production to counter the lost Venezuelan supply and the potential decline in Iranian crude exports later this year when sanctions take effect. News surfaced that the Trump administration requested Saudi Arabia to add 1.0 million bpd in new output to offset the effects of the Iranian sanctions. Reports suggest the oil ministers for Saudi Arabia and Russia both agreed to increase output, although continue to negotiate on how much to boost production.
OPEC meets in Vienna on June 22 and will discuss their production agreement. Reports indicate the meeting will be contentious. OPEC includes 14 members, and several of them, including Iraq, Iran and Venezuela, are disgruntled over the conversations between Saudi Arabia, the de facto leader of the cartel, and non-OPEC Russia. Oil prices are likely to remain volatile as we inch towards the meeting, and could rally if OPEC decides against adjusting its agreement cutting production.
Gasoline supplied to market this year has so far outpaced implied demand in 2017, although the growth rate slowed in May, sparking the thought that high gasoline prices are having a dampening effect on gasoline demand. Consumers are certainly shelling out more cash to fill up their vehicles, although a robust economy, a confident consumer and a job market with the lowest unemployment rate since 2000 are seen as a strong bulwark against demand destruction.
Memorial Day kicks off the summer driving season in the United States when gasoline demand peaks. Yet seasonally RBOB gasoline futures typically notch its annual high in May ahead of peak demand because of several factors, including this expectation. The scenario will probably hold true again this year, with the 2018 high for the futures contract likely reached in May, and retail prices softening after a brief trip over the sensitive $3 gallon.
Read the published article in Convenience Store Decisions here.