Gasoline Prices to Hit Six-Year Low if Oil Glut Persists

Gasoline Prices to Hit Six-Year Low, Could Dip Further As Oil Glut Persists

The decline in crude oil prices will persist as the extended global oil glut has pushed them to six-year lows.

Crude oil prices have not only hit all-time lows in 2015, but the downward pressure continues and could stretch out into 2016 as the issue with the oversupply has not dissipated, said Chris Faulkner, CEO of Breitling Energy, a Dallas oil and gas exploration and production company.

“The question I get asked every day is if the prices can go lower and the answer is unequivocally ‘yes,’” he said.

The surplus of crude oil in the market will force gasoline prices to dip even lower and could easily decline by another “10 cents or so coming in the very near term,” Faulkner said.

The pressure for prices to continue a declining trajectory is strong because refineries must take advantage of the cheap feedstock prices in the market to produce even more gasoline in the next month as prices historically rise in February.

“Refineries shut down temporarily for seasonal maintenance and blends switch over, which flush out gasoline overstock and prices begin to rise,” he said.

Since current market demands have met their peak, gasoline prices will “average less than the 2015 number and remain under $2.40 for the yearly average due to continued depressed oil prices,” Faulkner said.

“When we look at crude oil prices, we think the average remains range bound through April 2016 and we see some increase occurring in the last three quarters with the 2016 average at roughly $45 a barrel,” he said.

The outlook for oil prices is not favorable, as consumption rates are not expected to rise rapidly.

“We are in a new era of oil prices and should expect oil to remain under $65 through the end of this decade,” Faulkner said.

Prices at gas pumps across the country are averaging $2.00 a gallon in many states, according to Gasbuddy.com. The lowest price is in Missouri where gasoline prices are $1.76 a gallon. Running the gamut, prices are at $1.80 a gallon in Texas, $2.27 in New York and as high as $2.74 in Hawaii.

Low oil prices will remain as OPEC producers indicated they would continue their policy of “defending market share” at the last meeting and some of Iran’s oil could hit the market as early as mid-2016, adding further pressure on prices, said Timothy Hess, a lead analyst for the Energy Information Administration, the independent statistical arm of the Department of Energy based in Washington, D.C.

Cheaper gas prices have been a boon to American households who saved $650 to $700 this year, he said. Adding to their overall savings, consumers who rely on natural gas to heat their homes will pay 13% less this year compared to last winter as those prices have also declined and warmer weather is predicted.

The EIA estimates that gasoline in the fourth quarter will decline to average $2.04 per gallon in December 2015 and $2.36 per gallon in 2016. The increase in global oil inventories of 1.3 million barrels per day in November added to the downward pressure on North Sea Brent crude oil prices, which was $44 per barrel in November, a $4 per barrel decrease from October.

Brent crude oil prices will average $53 per barrel in 2015 and $56 per barrel in 2016, the EIA forecasts. The West Texas Intermediate (WTI) crude oil prices will average $4 per barrel lower than the Brent price in 2015 and $5 per barrel lower in 2016.

Production of U.S. crude oil declined by about 60,000 per barrels a day in November compared with October, the EIA said. Crude oil production is excepted to decrease even more through the third quarter 2016 before growth resumes late in 2016.

The continuation of depressed gas prices is an advantage for consumers, but the negative impact of oil companies filing for bankruptcies and laying off thousands of employees could soon outweigh the benefits of households increasing their disposable income, said Bernard Weinstein, associate director of the Maguire Energy Institute at Southern Methodist University’s Cox School of Business in Dallas. At least 20 more companies are predicted to file for bankruptcy in 2016, which trickles down to affect growth in other sectors such a manufacturing, construction and housing.

Predicting the bottom of the decline is becoming more difficult as “one of America’s biggest industries in 32 states is taking it on the chin,” he said. “The oil and gas industry has twice the impact on economic growth now than it had a decade ago. The contraction of the energy sector is retarding economic growth with capital spending down double digit percentages as projects are deferred.”

The lack of an increase in demand and the extended period of low commodity prices do not make it easy to determine “where the bottom is,” Weinstein said. “A year ago $60 was the floor and I didn’t think we would see $40 oil.”

The surplus in oil is not going away anytime soon, he predicts since “America has more oil and gas than we know what to with.”

“The whole planet is drowning in oil,” Weinstein added.

Article Author: Ellen Chang

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