Get Ready for $2 Gasoline Again

Source: By Mark Shenk, Bloomberg News • Posted: Wednesday, December 9, 2015

Who would have thought OPEC could bear tidings of seasonal cheer?

U.S. gasoline pump prices are poised to drop below $2 a gallon for the first time in more than six years, which is sure to bring comfort and joy to drivers. Oil has plunged by 39 percent since June and may keep falling after the Organization of Petroleum Exporting Countries essentially lifted the ceiling on its crude production.

Americans have saved about $100 billion on fuel this year, which comes to more than $350 a person, according to Michael Green, a spokesman in Washington for AAA. The lower prices and the recovery in the U.S. economy have put more Americans on the road than ever before and refiners are churning out fuel at a record pace.

“It’s just a matter of time before we breach $2,” said Patrick DeHaan, a senior petroleum analyst at GasBuddy Organization in Chicago. “We’re seeing oil prices reflect market conditions and that’s passing on to gasoline.”

Crude fell to the lowest in more than six years Monday after OPEC refused to limit its output. The average price of regular gasoline, meanwhile, was $2.027 a gallon on Monday, less than half the record $4.114 set in July 2008, according to Heathrow, Florida-based AAA, a national federation of motor clubs.

U.S. refineries produced 9.84 million barrels a day of the motor fuel in October, an all-time high for the month, the American Petroleum Institute said Nov. 19. Gasoline inventories on Nov. 20 were the highest for this time of year since 1990, Energy Information Administration data show.

Cheaper Crude

Crude prices have dropped faster than those for gasoline, a bonus for refiners. The crack spread, a rough estimate of profit from processing a barrel of Brent oil into gasoline, stands at around $10, more than 80 percent higher than a year earlier and the most for this time of year since at least 2009.

Refiners ”were spending $70 a barrel for crude and now it’s about half that,” said Stephen Schork, president of the Schork Group Inc. in Villanova, Pennsylvania. ”There hasn’t been a commiserate drop in product prices so they are doing well.”

Record Driving

During the first nine months of the year, Americans drove a record number of miles, Department of Transportation data show. Ford Motor Co. says Americans will buy 5 million SUVs this year, the most ever, bringing the large vehicles’ share of the U.S. auto market to 40 percent. That’s been fueled by low gasoline prices, cheap car loans and a desire for more room, according to Kevin Schad, brand manager for the Ford Escape.

“People are taking to the roads with abandon,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund. “We’re also seeing a switch to larger cars, with trucks making a bigger share of new car sales.”

The improvement in the economy is spurring demand as workers commute to jobs. Employers added more positions than forecast in November, government data showed Dec. 4, following a surge in October that was bigger than previously reported.

Weather Support

The weather also may give demand an added boost. December stands a good chance of being mild, especially across the U.S. Midwest and Northeast, according to the U.S. Climate Prediction Center in College Park, Maryland.

“The weather forecasts show little snow or ice in major markets in the Northeast and Mid-Atlantic so there will be very strong demand for gasoline going into the holidays,” Schork said.

Gasoline futures bumped higher early last week after the U.S. increased the amount of ethanol required to be blended into the fuel next year. This month, futures are down 11 percent to the lowest level since February 2009.

“Gasoline hitting $2 a gallon is a landmark for consumers,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “We’ve seen evidence of changes in behavior. Now it’s clear that this is for real.”