Oil and Gas

Gasoline futures to hit seasonal high in May

Where’s crude oil headed?

After a 61 percent surge in five weeks from a nearly 13-year low to more than $40 per barrel in March, will U.S. crude prices trend higher in spring? Take into account the following considerations:

  • Will OPEC and Russia agree to a production freeze at their January production rates?
    • Talk of the coordinated response to low prices and high supply underpinned March’s rally, but now an agreement is in doubt ahead of a proposed meeting on April 17.
  • Will Iran production continue to increase in the wake of sanctions’ relief?
    • Iran, with production at roughly 3.2 million bpd, said it would increase output to 4 million bpd.
  • Will the U.S. dollar, which has an inverse relationship with U.S. crude oil prices, trend lower in spring after rallying earlier in the year?
    • The U.S. Federal Reserve will be watched closely for a change in its dovish posture.
  • In April, will crude prices slip below $30 per barrel?
    • Crude prices are retracing the downside after failing to hold above $40 per barrel.
  • Will U.S. crude production finally drop sharply after a precipitous decline in active rigs drilling for oil?
    • The U.S. rig count is down 77 percent from its peak in October 2014.

After a slow start in January, gasoline demand has trended above historical averages, and could reach a record high in 2016. Diesel demand, however, is very weak, due to sluggish manufacturing activity in the U.S. and abroad.

Expecting more price volatility

With so many bearish factors, such as strong production and high supply levels, uncertainty will continue to drive price volatility. Several factors will need to collaborate in order for crude prices to crack above $45 per barrel, including:

  • Sustained drop in U.S. production
  • Continued strong gasoline demand
  • Drop in OPEC production
  • Drawdown in oil and refined products stored supplies
  • Strengthening of U.S. (GDP growth over 3 percent) and global economies

While a dramatic swing in the short term in any one of these categories is unlikely, gradual alignment over the course of the year could push oil prices above $50per barrel late in 2016.

Seasonal highs on the horizon

Despite abundant oil supply, gasoline prices are expected to follow their traditional seasonal swing higher in the spring, but will remain low compared to recent pump prices which is great for drivers.

On the futures market, the gasoline contract should reach a seasonal high in May at roughly $1.75 per gallon.  Strong driving demand over Memorial Day could cause extended price gains in the markets for oil and gasoline, but it’s important to note that abundant supply will limit upward price pressure.

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2 Responses
  1. Jason Lavis

    The supply glut is still quite big apparently. Tension in the middle east isn’t having its normal price effect. OPEC talked about freezing production at high levels… It is hard to imagine oil going above $50 this year… Unless… A black swan? Fracing ban in the US? Another few billion barrels missing from the ‘official figures’ hmmm…

    Reply
    • Brian Milne Brian Milne

      Thank you Jason for your comment.

      Fundamentals are clearly bearish, but as the year progresses we are likely to see a steep drop in US crude production that pushes prices higher. Moreover, when considering futures markets, price direction is driven in large part by expectations. So, if we are witnessing declining US crude production and demand remains healthy, there’s a strong likelihood for the NYMEX WTI futures contract to crack through resistance in the mid and upper $40s bbl, and top $50 bbl late in the year. A price over $50 bbl might not be sustainable if it sparks new drilling in the US, but we’ll need to see how market conditions develop over the coming months to better gauge such a dynamic.

      Reply

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