The national average price for a gallon of regular gasoline the Memorial Day is $2.97 according to AAA. That’s right where it was going into the holiday weekend and pretty much where analysts had predicted it would be.
Crude oil, however, has been taking some lumps. West Texas Intermediate (WTI) for July delivery settled at $67.88 a barrel last Friday, down about 4% for the day from near $70 on Thursday, and down nearly 5% for the week. Since then the black stuff has lost more than another dollar in electronic trading to trade at $66.69 Monday morning.
Friday’s drop was the result of reported discussions between Saudi and Russian officials to raise production for the first time since 2016. Reuters reported that production could rise by as much as 1 million barrels a day.
The production cut initiated by OPEC and 11 other oil-producing nations including Russia, has removed about 1.8 million barrels a day from global production since it went into effect in January 2017. The cut has drained some 360 million barrels from global stockpiles over a period of about 16 months according to a report at Bloomberg.
In April, global inventories fell about 20 million barrels below the five-year average in developed countries. While compliance by OPEC and its partners was critical to lowering stocks, what the cartel didn’t count on was the collapse of production from Venezuela.
Plunging production from Venezuela has caused output to fall by about 2.7 million barrels a day Russia’s energy minister told Reuters, nearly 1 million barrels a day more than the OPEC-agreed quotas. Bringing another million barrels back into production would close that gap.
On top of these discussions, U.S. production continues to rise and U.S. producers are drilling more new wells. Baker Hughes reported an oil rig count increase of 15 last week. Rig counts have been rising steadily all year as prices for crude rise.
OPEC knows from experience that pushing the price too high will bring on a flood of new U.S. drilling and the cartel will be stuck back in 2014 when prices collapsed into the $40 range. On top of that, the United States now exports significant quantities of crude, something it did not do back in 2014.
With prices falling by about $5 a barrel since last Thursday, U.S. consumers might expect to see pump prices fall. That will happen, but gasoline prices react much more slowly to falling crude prices than to rising crude prices so don’t expect a big drop and certainly don’t expect it right away. A gradual decline is much more likely, and if OPEC and its partners actually do agree to raise production, summer road trips might get a little less expensive than currently anticipated.