Don’t expect another big drop at the gas pump after June OPEC meeting
 

[May 28, 2015]  By Rob Nikolewski │ Watchdog.org
 
 The last time oil ministers from nations in the Organization of Petroleum Exporting Countries got together, motorists quickly saw a dramatic drop in gasoline prices.

But with OPEC delegates just days away from assembling for their next meeting, it looks like drivers won’t experience a summer rerun.

“You may not see a big decline in oil prices coming up,” said Michael Green, spokesman for AAA, the automobile organization that monitors gas prices across the country.

By all indications, OPEC honchos won’t make any changes from their decision in November, when they refused to cut production, triggering a near free-fall in global oil prices that led to a nosedive in prices at the pump.

“I think they’re going to come out with a statement that they think supply and demand are balancing and they’re just going to stay the course,” said Dan Steffens, energy analyst and president of the Energy Prospectus Group, based in Houston.

Steffens has plenty of company. Earlier this month, 33 of 34 analysts and traders surveyed by Bloomberg predicted OPEC delegates would not cut production when they meet June 5 in Vienna, Austria.

By keeping the cartel’s production flowing around 30 million barrels a day, the global market should have plenty of oil to meet the world’s demand.

But that doesn’t mean gas prices will fall like they did this past December and January, Green said, because the oil markets have adjusted to the “new normal” and have anticipated the likely OPEC decision June 5.

“It’s already baked into the price, essentially,” Green told Watchdog.org in a telephone interview. “So we wouldn’t see a dramatic selloff like we did back in November.”

What’s more, the summer driving season is just about to start, and that usually translates into higher gas prices across the country.

“So many people are taking long summer road trips, and demand is pretty high in the summer,” Green said. “July and August are peak demand periods, and gas prices are relatively high. There are other issues that are unrelated to oil, such as (potential) hurricanes in August or September that affect refinery production. Also, refineries can have problems this time of year just because they’re producing so much gasoline, they’re running hot and the likelihood for unexpected issues can increase.”

According to AAA, the average price of gas in the U.S. on Tuesday was $2.74 a gallon, with California posting the highest price at $3.76 and South Carolina posting the lowest average price per gallon at $2.43.

The effects of the OPEC decision caused oil prices of Brent crude — the standard recognized in international markets — to crash from $115 a barrel in June 2014 to $45 a barrel in January.

That led to gas prices in most states dropping below $2 a gallon by Jan. 26. Prices have since gone up about 40 percent but, AAA said, motorists are still paying less for gas since 2010.

Ironically, the biggest losers should OPEC maintain its no-cuts policy may be other OPEC countries that need the price of oil to stay high to prop up their struggling economies.

The representative from Venezuela reportedly stormed out of the November meeting, and Nigeria lobbied OPEC officials to cut production but all indications are that the cartel — dominated by Persian Gulf countries — won’t budge.

“I believe that countries as mine will not have much influence in front of Saudi Arabia and Gulf states in decreasing the production,” a delegate from an African OPEC country who preferred not to be identified told Reuters earlier this month. “OPEC is presently dominated by the Gulf producers.”

Saudi Arabia isn’t meeting the current break-even price, either, but the Saudis set aside an estimated $750 billion in foreign currency assets before the November decision, and the kingdom figures it can ride out the storm.

“OPEC’s really made up of three countries that can handle this and rest of the countries that can’t,” Steffens told Watchdog.org. “Venezuela is going broke, Nigeria’s in trouble. They’re all just busted at these prices.”

U.S. producers have also been hurting since OPEC made its November gambit.

Although the Saudis denied it at the time, the move was in large part a way to counter North American shale oil producers, whose hydraulic fracturing and horizontal drilling techniques have grown so productive in recent years that the U.S. was on pace last fall to unseat Saudi Arabia in worldwide liquid petroleum production.

In the ensuing six months, shale producers across the country have laid off employees and slashed rig counts from about 1,800 to fewer than 900.

Data released earlier this month by the U.S. Department of Energy showed domestic crude production dropping by 112,000 barrels a day to 9.26 million in early May.
 

“Dramatic cuts in spending and drilling are finally having an impact, so why on earth would Saudi Arabia change course now their strategy is just starting to bear fruit?” Mike Wittner, head of oil research at Societe Generale SA, asked Bloomberg. “Anyone who expects anything to happen at this meeting is going to be sorely disappointed.”

But Steffens said the U.S. shale producers are holding up relatively well.

“They’re in pretty good shape,” Steffens said. “When (the price approached) $40, there was all this talk of a gazillion bankruptcies and whatever. There have been a few but not a drastic number. I think they’ve hunkered down, in survival mode. You’re still getting good cash flow at $50-$60 oil.”

As for motorists who are hoping for a price break, AAA’s Green said their best bet is to wait a few more months.

“By winter in a normal year you’ll see gas prices drop pretty significantly heading into December and January, just because less people are driving and the weather is not as good,” Green said.