Gas prices a steal all summer, analysts say

Richie Trott of Little Rock pumps gas for $2.07 a gallon Thursday at an Exxon station on University Avenue in Little Rock. A slump in the global oil market has produced some of the cheapest gasoline prices in a decade.
Richie Trott of Little Rock pumps gas for $2.07 a gallon Thursday at an Exxon station on University Avenue in Little Rock. A slump in the global oil market has produced some of the cheapest gasoline prices in a decade.

American motorists have been experiencing some of the cheapest gasoline prices in a decade for almost two years now, as a result of a persistent glut in the global oil market.

But as soon as next year, they could see pump prices rise as a recovery in the oil market gains traction. Or maybe not.

Nationwide, gasoline averages $2.28 a gallon, down from $2.76 a gallon a year ago. In Arkansas, a gallon of gasoline averages $2.06, compared with $2.50 in 2015.

However, some service stations are selling gasoline for less than $2 a gallon. In Fort Smith, for example, some stations have gasoline listed for $1.81 and $1.84, according to gasbuddy.com, a price-tracking website.

How long consumers can expect to see such low fuel prices largely depends on if the current rally in oil prices is a sign the market is rebalancing. Analysts are split on the longevity of the current upturn.

"I think the age of low oil prices is over for a while, and I think they are going to start inching higher," said Phil Flynn, an energy analyst with Price Futures Group.

U.S. producers, in response to low oil prices, have idled drilling rigs, "but not enough to offset the larger supply picture," said Rob Lutts, president and chief investment officer for Cabot Wealth Management.

"We're not in a situation where we could expect to see dramatic increases from here," he said.

The oil slump has persisted since 2014, when oil traded above $100 a barrel, because of an abundant supply of crude and weakened demand. But since prices have fallen, oil producers have cut spending, deferred exploration projects and laid off tens of thousands of employees.

This pullback in activity by energy companies has led to a drop in domestic oil production. There has also been unexpected oil production drop-offs in Nigeria and Canada.

As a result, oil prices have rallied after dipping below $30 a barrel earlier this year and have now gained more than 30 percent since January on expectations that the global oil glut is dwindling.

"The main reason I think [oil prices] are going to inch higher is we are seeing a lack of investment in the energy space," Flynn said.

Many analysts expect oil prices to linger around $50 a barrel for the rest of the year, and if they do increase, they do not expect prices to rise any higher than $55.

This is despite the fact that low fuel prices are driving gasoline demand to record levels. American drivers on the road for the Fourth of July weekend will see the cheapest fuel prices at the pump since 2005.

But any bump in prices will also be checked by the overabundance of crude.

"$50 is proving to be a really, really difficult number to get above," said Tom Kloza, chief oil analyst for gasbuddy.com.

Other analysts say $50 oil or higher will entice U.S. producers to drill new wells or restart idled ones, which will raise production and ultimately lower prices again.

There could also be more downward pressure on prices if or when any of the unexpected drop-offs are resolved and more oil comes on to the market.

"I think it's just going to tighten the noose on the smaller, [debt-laden] companies, and the ones not in such bad shape will slowly get their balance sheets in order and start expanding again," said Michael Lynch, president of Strategic Energy and Economic Research Inc.

The United Kingdom's vote to exit the European Union is also a wild card. The surprise election result threw global markets and currencies into turmoil.

The markets have since stabilized, and oil prices have rebounded somewhat, but there's still heavy concern about the global economic effect of the U.K.'s decision and how it will play out.

The concern is that a slowdown in economic growth will reduce oil demand, which will do little to shrink the glut.

Oil prices fell after the vote because it strengthened the U.S. dollar, which makes oil more expensive for foreign buyers.

"Brexit frightens people a little bit," Kloza said.

So what does this mean for the future of gasoline prices?

Kloza sees gasoline demand in July that is strong enough to drive oil prices "a little higher" if crude production doesn't suddenly take off.

But, he said, gasoline demand will fall about 4 percent to 5 percent after Labor Day as the summer driving season comes to an end.

Because there is so much crude, refineries are producing records amount of gasoline. This will leave more gasoline on the market than there is demand for once summer ends, eventually lowering prices below $2 by the end of the year.

Lynch said gasoline prices have hit a "sweet spot," and he doesn't expect to "see much whipsawing over the next year or two."

Flynn disagrees, saying "these low gasoline prices are going to start going higher over time, and it could go sharply higher down the road."

"In the meantime, I think, we're going to benefit from the low oil prices this entire summer," he said.

SundayMonday Business on 07/03/2016

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