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OPEC Raising Output Less Than Expected

Already arresting pump price slide

CAMARILLO, Calif. -- Finally, after nearly four months of price increases at the pump, there has been a drop. Between Feb. 23 and June 8, the U.S. average price of regular-grade gasoline climbed 24.36 cents. It is now down 6.37 cents to $2.95, according to the most recent Lundberg Survey of U.S. fuel markets. Often, this time of year the retail price trend continues down, coinciding with the season of robust consumer demand.

This two-week retail price cut is thanks partly to the Organization of the Petroleum Exporting Countries (OPEC), which had told the world it would increase oil output at its June 22 meeting, and which contributed to lower oil prices. On May 25, West Texas Intermediate (WTI) dropped by close to $3 per barrel on the news, and the price weakened further from there. But the June 22 implied output increase turned out to be less than the oil market apparently expected, because on that day, WTI prices jumped by just more than $3 per barrel. Refiners are already paying more for oil. They are already passing their oil buying price increases into higher wholesale gasoline prices. Retailers will be hit by those and hand them off to motorists very soon.

The OPEC production increase is implied, not absolute, because its decision is to adhere to its November 2016 output reduction instead of 152% of that reduction, which turned out to be what was produced. Venezuela is one important reason that the slide in output was deeper, because the country's state oil company has been incapable of stemming its decline. The supply increase, effective July 1, may turn out to be as modest as 600,000 to 800,000 barrels per day.

Also, the June 22 OPEC agreement did not include country-specific allocations of output. The 14-member organization, sans nonmember participants in recent production agreements, can simplistically be described as the Big 7 and the Little 7, in terms of May 2018 oil production levels, with Saudi Arabia accounting for more than half the existing spare capacity. OPEC did announce that it is welcoming a new member, Congo.

In these latest two weeks, refiner margin on gasoline was seriously eroded, while retailer gasoline margin edged up again. The current 25.75-cents-per-gallon retail margin is the best so far in 2018.

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.

Photo courtesy of Zscout370. 

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