Oil rates are crashing. They have plunged to $38.00 per barrel, but consumers are still getting squeezed by high gas prices at the pump. What gives?
West Texas Intermediate (WTI) was trading in the mid-$38.00 range Monday morning as crude continues to test six-year lows. But the price of gasoline barely felt the drop, declining from $2.67 to $2.59 per gallon. (Source: Fuel Gauge Report, last accessed August 24, 2015.)
What’s going on here?
It’s really a matter of supply fundamentals, according to Andy Lipow of Lipow Oil Associates. (Source: CNBC, last accessed August 24, 2015.)
High gasoline prices are being supported by issues with oil refining facilities in California and the greater Chicago area, according to Lipow. The oil market veteran explains that a refinery accident in one of BP’s largest U.S. refineries, along with a serious explosion at a California Exxon Mobil refinery in February, are keeping oil prices high.
Other parts of the U.S. would offset this decline, but pipeline capacity to the Midwest is running at maximum. (Source: CNBC, last accessed August 24, 2015.)
Typical summer demand for gasoline, driven by vacation driving, has kept demand up but refining bottlenecks in the two areas mentioned has reduced available supply.
But for oil, it’s going to get worse before it gets better. With Labor Day just around the corner, North American refineries will enter into maintenance season as summer driving demand slows down. (Source: Bloomberg, last accessed August 24, 2015.) Lipow has forecasted a WTI price range of $32.00 to $34.00 per barrel, citing global oil stock buildup and low winter demand to exert downward price pressure on crude until at least March 2016. (Source: The Wall Street Journal, last accessed August 24, 2015.)
However, Lipow expects gasoline prices to decline somewhat by year’s end, falling by approximately 35 to 40 cents per gallon. (Source: CNBC, last accessed August 24, 2015.) As gasoline demand declines this Fall and large oil companies get their refineries back into shape, the possibility of gas prices aligning more with limping crude oil is becoming more and more likely.