Fuel prices have been spiraling downward—with the exception of a short-lived spring spike—for months now. Oil overproduction and other factors have played into the cheapest prices in years for the end-user. Of course, there are always winners and losers when the price of any commodity rises or falls. Modern WorkTruck Solutions recently asked Denton Cinquegrana, chief oil analyst for OPIS (Oil Price Information Service), to share his views on the oil market, those impacted, and what we are likely to see in terms of production and fuel prices in the foreseeable future.
MWS: Summer oil prices continue to trend downward due to the global oversupply of oil reserves. What other factors are keeping oil prices below the averages we have seen in recent years?
The strong U.S. dollar has played a large role in oil prices staying low this summer compared to other summers. Because oil is priced in dollars per barrel, those that may be buying in a foreign currency lose “buying power” when the dollar is strong.
Growth in China and other emerging markets has been one of the key drivers of global oil demand over the last decade. As some of those economies have slowed, there are concerns about a hard landing for the Chinese economy and the implications on demand.
The lower oil prices this summer are in large part due to the strong production levels of OPEC and non-OPEC nations. By the end of the year, more oil from Iran is likely to be on the market. It will be difficult for the market to absorb so much extra oil.
OPEC, in keeping production levels high, has made a play to “crowd out” the high-cost producers. This strategy has seen some marginal success; however, Saudi Arabia continues to produce oil at record levels, and in July, Iraq also saw record production. The record for U.S. production (at a little more than 10 million barrels per day in 1970) looks like it will stand, as output has leveled off in recent weeks; however, production in 2015 will be the highest since 1973.
MWS: What are the effects on oil producers in the United States?
Falling oil prices have forced the hand of producers in some good ways and some bad ways.
Job cuts have been in the headlines for almost a year now, and while that may be one of the downsides of the lower oil prices, producers have also gotten better at what they do.
Producers in the shale plays have concentrated their efforts on the most liquid rich wells. Through a combination of technology and concentrating on the highest production wells, they have been able to lower their cost per barrel.
When prices started to drop sharply, producers in the shale plays needed $70-80 a barrel to break even; reality has shown that break-even costs, in a lot of cases, are much lower than what had been originally thought.
The low prices have pushed some projects to the back burner. While the focus here is on the United States and the impact low prices have on production, the real pain is being seen in Canada. All new projects are on hold there, but output continues to progress and push higher.
MWS: What impact have lower oil prices had on manufacturing, construction, and other service-oriented markets in the US?
I would say that the lower oil prices have helped more than hurt. Gasoline prices on the street this summer were the lowest since 2009. Diesel averages in nearly half the states are now cheaper than gasoline. Those have been two of the most obvious positive factors for the US economy.
Cheaper gasoline and diesel prices have not lead to the bonanza in discretionary spending that some economists had expected originally, but the savings are not insignificant. OPIS estimates that US drivers are going to save roughly $127 billion in gasoline expenditures in 2015 when compared to last year.
There has been a renaissance for refiners; even as refined product prices have been relatively low, cheaper feedstocks (i.e., crude oil) have been a boon for independent refiners.
On the other hand, the low price of oil has kept inflation low and has been a bit of a drag on US GDP. Job losses have also been a concern for the US economy; however, those job losses have largely been concentrated in the oil production sector.
MWS: A handful of states have seen the average retail diesel price drop below the average gasoline price. Will this happen for the US average? What drove this reversal and do you see it as a long-term trend?
Seventeen, and at one point as many as 21, states saw their average diesel price fall below the average price of gasoline by the end of July. As of this interview, the average diesel price in the US is just cents higher than the average gasoline price, according to the AAA Fuel Gauge Report.
Refiners have been motivated for some time to process as much crude oil as possible in order to take advantage of strong margins. In recent years, diesel has offered better returns; but that changes in the summer when refiners focus on gasoline demand.
Additionally, most of the new global refining capacity brought online in 2014 and 2015 has been heavily tilted toward producing distillate, increasing the competition for US exports. That also increases the possibility of US diesel exports getting shut out, keeping inventories on the rise, and likely pressuring prices.
MWS: What effect has falling oil prices had on alternative fuels?
I am a firm believer that, at the end of the day, the only thing that will give alternative fuels traction in the transportation industry is price. There are some mandates that have helped the biofuel industry, but it boils down to price.
Not only have oil prices fallen due to the fracking boom in the US, but natural gas production has increased significantly, as well. Fleets have found some success with using CNG, and I do believe there will continue to be advantages to that fuel for fleets.
The fall in oil, gasoline, and diesel prices, though, will make the alternative fuels’ battle for market share an uphill one for the time being. While technology and alternative fuels have made strides from a BTU standpoint, the gasoline and diesel hydrocarbon continue to offer the best bang for the buck.
MWS: Where do you foresee the prices of gasoline and diesel fuel going in the next 12 months? What factors could change this?
When the oil markets first started to fall apart in late 2014, many analysts expected the first half of this year to be rough, with increased demand soaking up the global oversupply. That has not been the case so far and many forecasters are expanding the timeline for a price recovery.
This bodes well for fleets and the driving public for much of the next 12 months. With the exception of California, which is essentially a “fuel island” and tends to disconnect from the rest of the country, expectations are for fuel prices to remain moderate for the next year. Fuel prices in 2016 are likely to mirror the peaks and valleys of 2015.
Diesel is expected to continue its seasonal patterns with winter heating requirements and the fall harvest giving a quick jolt to demand.
There are several factors that can turn these forecasts upside down. Geopolitical risk is always something to be aware of; the world can be a dangerous place. The Middle East and North Africa (often referred to as MENA) is perhaps the most volatile region on the planet. A widespread regional conflict can have a large impact on prices. Hurricanes are also something we are always keenly aware of; however, what usually gets lost in the hurricane hype is that these storms are more demand killers than supply killers over time. In the event of a hurricane damaging the refining capacity of the US Gulf Coast, prices will spike in short order and demand will take a dive at the same time.