CAMARILLO, Calif. -- The national average price of regular-grade gasoline on the street is $2.1997. That price is actually down 0.35 cents per gallon (CPG) since Nov. 18, according to the most recent Lundberg Survey of approximately 2,500 U.S. gas stations. But it is about to jump, thanks to a group of state government oil companies and their cooperators.
The Nov. 30 formal agreement by the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC cooperating nations to reduce oil production translated instantly to oil price increases, followed by rapid pass-through of most of those increases into wholesale gasoline. On Dec. 1 and Dec. 2, retailers got slammed by rack and dealer tank wagon (DTW) price increases, destroying their margins. The Dec. 2 snapshot shows an average regular-grade retail margin crash of 13.03 CPG.
In the Houston retail gasoline market, which can’t help but appear to many as a symbol of the oil market and refining, the average price of regular grade was a super-low $1.9109 on Dec. 2, bringing in an average margin of only 1.41 CPG on that date. The national weighted average retail margin, which includes some still-hefty margins that hover wonderfully close to 40 CPG, is a sad 11.99 CPG. That poor number is barely better than the nightmarishly low levels suffered in 2006 and 2007.
The OPEC plan is for members to comply with a combined product cut of 1.22 million barrels per day (bpd). It will rely in part on cooperative cuts for the next six months from nonmember countries, especially Russia. At that point, OPEC will review the scene at its next meeting. The world oil market thinks OPEC means it, so oil prices leaped out of their long-held range of about $40 to $50 per barrel. But the degree of actual, not just promised, compliance, will influence where oil prices go from here.
Two members, Libya and Nigeria, are exempt from the deal, while Venezuela, similarly suffering from internal problems that crimp output, is not. All members, along with the rest of the world’s oil-producing countries and companies, have been limping for years from injuries to price brought on in part by the surge in U.S. oil production. Many OPEC members’ own data on their production differs significantly from what OPEC assesses it to be. Non-OPEC members who signed on to the deal say their participation in cuts will depend on OPEC manifesting its promised cuts. Russia's contribution to an actual reduction of supply will be implemented gradually, it says.
If OPEC compliance actually turns out to be strong, then oil prices may get a second wind and climb further, so that the near-term jump at the U.S. gasoline pump would be followed by more of same.
In coming days, when street prices rise a dime or more, it will be due to U.S. refiners—and retailers even more so—operating under stress to recover gasoline margin losses. These losses came from a global expectation that an announced cut in world supply would become real.
Unfortunately, if somehow down the line there is little or no real reduction in OPEC oil production, gas-station operators will be unfairly treated with suspicion by consumers and those who claim to speak for them.
Camarillo, Calif.-based Lundberg Survey Inc. is an independent market research company specializing in the U.S. petroleum marketing and related industries. Click here for previous Lundberg Survey reports in CSP Daily News.