Wednesday, September 17, 2014

Retail prices drop despite OPEC production cut

This was one of the predictions I made at the end of Another fall in gas prices surprised me.
As for next week, I wouldn't be surprised if gas prices fall again to between $3.35 and $3.39.
Today, it came true.  The three stations down the street all lowered their price for regular to $3.35.  The corner station is still at $3.41, but it's only a matter of time before it drops its price, too.

The next piece of good news is that prices are still 14 cents below this time last year, when the neighborhood price for regular was $3.49.  Even if prices don't budge during the rest of the week, they will still be a dime lower than they were a year ago this coming Thursday, when all the nearby stations sold gas at $3.45.  It's almost enough to make me post Professor Farnsworth.  Almost, but not yet.

The odd thing about this price drop is that it seems premature, just like the last one.  GasBuddy shows that both the national and Detroit averages are falling.  The national average is now $3.38, three cents below the $3.41 of the last update.  The Detroit average is now $3.49, also three cents lower than the previous report.  By these measures, the nearby stations are underpriced relative to the local retail price environment.  They should be at $3.39.  That means it's time to follow over the jump for the current wholesale price environment and what it portends for the near future.

The Wall Street Journal gives me a reason not to expect local prices at the pump to fall more this week, reporting Oil Strengthens on Report that OPEC Could Cut Output.
Report Says OPEC Could Cut Production Target to 29.5 Million Barrels a Day

Oil prices strengthened Tuesday after the head of the Organization of the Petroleum Exporting Countries said the oil producers' cartel could lower its production target for next year.

Brent, the global benchmark, has slid more than $15 from its high in mid-June as ample global supplies and tepid demand weighed on the market.

Brent prices have held below $100 a barrel since Sept. 9, and market participants have closely watched OPEC for indications that the group would cut production in response to the weaker prices.
OPEC's announced production cut had the expected effect.
Brent rose $1.17, or 1.2%, to $99.05 a barrel on ICE Futures Europe.

Light, sweet crude for October delivery rose $1.96, or 2.1%, to $94.88 a barrel on the New York Mercantile Exchange.
This makes the prediction I posted in a comment to The Era of Bad Feeling at Kunstler's blog look good.
"Expect that mirage to dissipate in the next 24 months, perhaps sooner if the price of oil keeps sinking toward the sub $90-a-barrel level, where there’s no economically rational reason to bother drilling and fracking."

I've seen the prequel to this movie before.  In early 2009, the price of West Texas Intermediate bounced off a floor of $35/barrel, which just happened to be the level at which tar sands broke even.  I was worried that the price would drop below that level and start to dry up that source of oil.  It didn't happen.  I suspect the same thing will happen this time, with WTI bouncing off the $90 level, saving tight oil as a source of energy for now.  In the meantime, the relatively low price for fuel will have the effect of boosting economic activity by promoting driving and spending--in other words, more happy motoring, for now.
Yesterday's price action sure looks like a bounce off a floor to me.

What about distillates?
Front-month October reformulated gasoline blendstock, or RBOB, rose 2.80 cents, or 1.1%, to $2.5588 a gallon. October diesel gained 1.67 cents, or 0.6%, to $2.7563 a gallon.
RBOB is now three cents higher than last week, when it was $2.5245 a gallon, while diesel is half a cent higher than last week's $2.7474 a gallon.  None of this suggests a rapid drop soon, although I expect the seasonal price trend to resume in a week or two.  My prediction of $3.29 by the end of the month is still possible.

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