WALL, N.J. -- Averages are inherently misleading. As the saying goes, if your left foot is in a pail of ice and your right foot is in a bucket of hot coals, then perhaps “on average” your temperature is normal.
Tossing that aside, the Oil Price Information Service (OPIS) is looking for another year of wild gasoline and diesel price moves, albeit without the extreme lows that bewitched market watchers for crude oil in 2016.
This year is off to a “lumpy” start in a motor-fuel market that promises to be exceptionally lumpy in the next 12 months. The changes in Washington may only exacerbate the traditionally irregular trends in the United States and Canada. This year will probably be front-end-loaded, with the Organization of the Petroleum Exporting Countries (OPEC) and non-OPEC countries’ adherence to production cuts much higher in February than it is likely to be when summer arrives.
Here is a mixture of more predictions and observations gleaned from a deep dive into the numbers that will be faced by President Trump, his cabinet and the 115th Congress ...
Crude-oil markets are smoothed by an extraordinary amount of trading that is now a daily occurrence in global futures’ exchanges. Unprecedented interest in crude as an asset class dictates that every merchant bank, hedge fund or algorithmic commodity pool has a stake in the game. Within the past few months, we’ve seen daily sessions in which more than 100 times as much paper crude trades as is consumed by planetary denizens in 24 hours.
But an interesting phenomenon has occurred as the crude-oil market has grown bigger. Although Wall Street used to attach a large premium to the price—reflecting the various geopolitical monkey wrenches and the tiny additional capacity that could be tapped in such events—North American shale oil has become a game changer. The huge financial entities are often the circuit breakers when there is buyer overload.
OPIS expects that the average price for West Texas Intermediate (WTI) in 2017 may not be all that distant from the $52.17-per-barrel December 2016 average. Put another way: Crude oil may be in a bull market, but the bull may be running in a pasture of quicksand.
Gasoline is a different story. If crude oil is “Steady Eddie,” the gasoline market is the bipolar equivalent of a 21st-century Sybil.
Right now, we’re in the trough period between Boxing Day and Groundhog Day. It’s hard to get excited about motor fuel when January sales are 10% or more below volumes witnessed during the driving season. There will be false reports that suggest current demand woes are attributable to prices that are about 40 cents per gallon (CPG) higher than the same time last year, and virtually no mention that short days and frigid temperatures cut severely into first-quarter driving.
Look for the average U.S. gasoline price in 2017 to land somewhere between $2.409 and $2.499 per gallon, but don’t be surprised to see a period in which the national average slumps as low as $2.099 or as high as $2.80 per gallon. Not a single state in 2016 ever got above the $2.974 per gallon achieved by Hawaii, but OPIS expects that 10 states may occasionally move above $3 per gallon this year.
Over the last more than 30 years, RBOB futures (Reformulated Blendstock for Oxygenate Blending) have, on average, rallied about 57% from their fourth-quarter low to the spring high. The low last November was $1.2684, which suggests a spring peak around $1.99 per gallon.
OPIS expects the rally will be more substantial, putting the RBOB top between $2 and $2.25 per gallon. Refinery downtime should remove 25% to 30% of capacity at intervals later in this quarter. Throw in the usual assortments of refinery blips, burps, power outages and events, and you have a recipe for an extraordinarily active spring.
A $2-per-gallon wholesale gas price dovetails with expectations that prices for WTI might top out in the $60- to $62-per-barrel neighborhood. The $2 price equates to $84 per barrel, or $22 to $24 per barrel above crude’s upper reach. Throw in the $3 per barrel or so that some merchant refiners must pay for RIN (Renewable Identification Number) compliance, and you have peak refining margins that are reasonable by contemporary standards.
Don’t be surprised to see little or no gasoline demand increases from 2016. Thanks to the lag in recording 2016 numbers, it is still not clear whether demand in 2016 topped the record level of 9.286 million barrels per day established in 2007. Final numbers will be issued by the Energy Information Administration (EIA) on Feb. 28, 2017.
OPIS calculates that the U.S. motor-fuel bill in 2016 averaged $828 million per day, putting the annual spending sum just over $302 billion. That number compares with $1.32 billion per day in 2012 when the yearly cost topped $480 billion. We can all wonder where the extra consumer dollars were spent.
In retrospect, U.S. and international refiners were too optimistic about gasoline one year ago, and they ran at higher rates than they might pursue in 2017. Meanwhile, refinery capacity additions have stalled. OPIS expects virtually no additional stateside refining capability in 2017.
Global supply and demand
Global demand for oil in the first quarter of 2017 should exceed global supply, and that tilt will represent the first such quarterly instance of tightening barrels since 2013. But in the subsequent three years, the world has built up a gelatinous belly of extra crude that won’t disappear in a quarter or two.
On the other hand, gasoline stocks represent a “perishable” inventory that never really sees a glut. We see 2017 inventories that are tighter than 2016 levels.