Will Gas Prices Keep Rising?

The rise in the price of oil (WTI) has also pressured up gasoline prices. They are currently around the $3.5 per gallon mark . Despite the recent rally of gasoline prices, they are likely to come down in the coming months.  Let’s see why.

Don’t blame OPEC this time…

Even though OPEC’s policy to maintain its quota at 30 million bbl/day has pressured up oil prices in the past, in recent months OPEC’s production has increased mainly due to the slow recovery of Libya’s oil production and the sharp rise in Iraq’s production . Moreover, OPEC’s current oil production is higher than the agreed upon quota: As of February, the output reached 31.4 million bbl/day. If OPEC continues to increase their production, this trend could pressure further down the price of oil. On a global scale, the International Energy Agency projects oil supply will rise by 1.7 million bbl/day during 2014. Global oil demand will increase by only 1.4 million bbl/day. Therefore, the global oil market is expected to loosen in 2014 compared to 2013. This trend is likely to also loosen the U.S oil market. Speaking of which, let’s examine the local market.

In the U.S, according to the U.S Energy Information Administration ’s recent weekly update, since the beginning of the year, refinery inputs have declined by 6.3% to reach, as of last week, 15.112 million barrels per day. The drop in refinery oil throughout suggests the demand for oil has decline in the recent weeks. Looking forward, the capacity of oil refinery is likely to rise:  Leading U.S refiners such as Valero Energy (NYSE:VLO) and Marathon Petroleum (NYSE:MPC) are expected to augment their production. Valero Energy is investing in its Gulf Coast refineries, which account for roughly 56% of its total throughput volumes capacity , in order to expand their refining capacity. Marathon Petroleum  plans to augment its refining capacity by 50,000 barrels a day by processing oil from Eagle Ford shale oil fields and the Utica field. Furthermore, the company will increase its capital expenditure during the next three year to $4 billion — nearly $1.7 billion more than in the previous three years. These developments are likely to increase refinery throughout and thus further loosen the gasoline market.

The U.S oil supply has slightly decreased by 1.1% to 15.325 million barrels per day during 2014 (up to date). Despite this modest drop in oil supply, the oil market is still loose, because the supply is higher than the demand for oil. Moreover, the EIA estimated the harsh winter conditions have also been responsible for the decline in oil production during the beginning of 2014. As the winter clears out, the oil production is likely to pick up.

The colder-than-normal winter has raised the demand for heating oil. This, in turn, has also pressured up the price of oil. Looking forward, the EIA projects the demand for liquid fuels including motor gasoline to remain flat during 2014 . Since the supply is expected to rise and the demand to remain flat, the U.S oil market is likely to loosen, which could bring down gasoline prices (or at the very least keep them from rising any higher).

In conclusion…

Even though oil prices are around $100, the oil market is likely to cool down in the coming months on account of the expected rise in production and stable demand. Therefore, gasoline prices are also likely to follow and decline to below the $3.5 mark.

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