CAMARILLO, Calif. -- The Organization of the Petroleum Exporting Countries (OPEC) had its Dec. 7 meeting and determined with several cooperating nonmember oil-producing nations to cut production by 1.2-million barrels per day starting January 2019. This apparently bumped oil prices, which could spell an end to falling U.S. gasoline prices.
But maybe not. The oil price bump, just a couple of dollars per barrel, may not hold. And even if it did, U.S. gasoline market dynamics may prevent gasoline from following crude.
The U.S. average retail price of regular-grade gasoline fell 21.62 cents per gallon (CPG) during the three weeks Nov. 16 to Dec. 7, to $2.5066, according to the most recent Lundberg Survey of U.S. fuel markets. It has been dropping for three months, a total of 40.13 cents since Sept. 7.
The West Texas Intermediate (WTI) oil futures price has fallen by about one-third since its 2018 peak in early October, due in part to burgeoning U.S. shale oil output. The abundance of global oil supply has benefited motorists around the world as well as in the U.S. OPEC's agreement would soak up some extra supply. But it is to last just six months, and its impact assessed prior, in early spring, and there are as usual no country quotas. Three OPEC members remain exempt. Russia, a key participant in the agreement, is expected to phase in some cuts gradually, as in the past. For now, oil production cutters are indicating that they are ready to sacrifice some oil sales for sake of stronger oil prices in the future.
To whatever degree the production cut actually occurs, an unknown up-price effect will filter into the U.S. gasoline market, whether visible at the pump or not.
However, downstream, gasoline margins are suffering. U.S. refiners have lost yet again, and in these three weeks, retailers gave up some gasoline margin as expected. Retail gasoline margin on regular shrank by 8.33 cents to a still very attractive 32.50 CPG. If from here no oil price change is assumed, then refiners will have to cry uncle at some point despite their saving grace of diesel fuel prices having deteriorated less than gasoline prices have. This leaves retailers, who may well lose another chunk of gasoline margin in the near future. In this scenario, nobody—not OPEC, not refiners, not retailers—wins, but American motorists do.
If the far lower pump price—now four cents under its year-ago point—sparks even a moderate gasoline demand comeback, then the entire U.S. downstream industry will be rewarded.
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.