Nearly everyone expected the OPEC+ decision to start raising oil production on Friday, with U.S. drivers excited to get some relief from high gas prices at the start of driving season. While OPEC did indeed announce the expected decision, oil prices jumped and they look unlikely to trend downward any time soon for drivers.
OPEC ministers claimed the group would increase its overall production by a million barrels per day, but the increase is likely to be much lower because some members - Venezuela and Iran in particular - will find it difficult to increase their current level of production. Exactly how much of an increase we will see remains unclear, but the very fact that the production jump will be smaller than traders had hoped for has been enough to send prices spiking.
In fact, all OPEC said in its statement after the Friday meeting was that it will rein in its compliance rate from the 152 percent for May to 100 percent. Estimates made on this basis suggested the actual increase will be a bit over 600,000 bpd, with another 400,000 bpd to come from Russia and non-OPEC signatories to the 2016 deal. That’s not in the statement, either - it came from Nigeria’s Oil Minister Emmanuel Ibe Kachikwu.
No wonder, then, that WTI booked a rise of 6 percent last week, and though it might ease off the current highs, it will hardly fall low enough for drivers to be happy. Driving season means greater demand for gasoline and greater demand invariably means higher prices. Also, as GasBuddy senior petroleum analyst Dan McTeague told NPR, driving season also sees refineries churn out more lower-emission fuels that are costlier to produce. Related: Saudi Oil Minister: OPEC+ Agreement Is Just The Beginning
"My guess is that you are going to see sustained higher prices at least for the foreseeable future, end of the summer," McTeague said, rubbing salt into the wound by adding that prices at the pump this year are likely to be possibly the highest since at least 2014.
This makes perfect sense, since crude oil prices are now the highest in more than three years, but not everybody is so pessimistic. The AAA, NPR reports, is actually upbeat about gas prices, expecting the beneficial effect of higher OPEC and Russia production to make itself visible some time later, when the production increase actually starts.
On the other hand, the strength of this effect might not be particularly great, again, for seasonal reasons.
"What we are seeing is a fairly typical pattern," short-term energy outlook analyst Timothy Hess from the Energy Information Administration told NPR. Prices at the pump will likely inch up as July 4th weekend approaches, with the EIA projecting peak summer prices of $2.91 per gallon next week.
Leaving seasonal supply and demand dynamics aside, it is likely that traders were just too optimistic about OPEC and Russia’s meeting last week, possibly expecting Russia to prevail with its proposed 1.5 million bpd increase in total production, although that claim was highly questionable from the start.
Yet reports suggested the 1.5-million-bpd was a tactical move to get the more unwilling OPEC members on the output increase train by first hitting them with the 1.5-million-bpd proposal and then lowering it to a more palatable level. If that was the case, the goal was accomplished. Unfortunately, this won’t help U.S. drivers this summer season.
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By Irina Slav for Oilprice.com
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That means that the front-month contracts have the highest price and each contract delivery month that follows is a lower price.
As I type this, Jul'18 is 2.0768; Aug'18 is 2.0576, Sep'18 is 2.0382, Oct'18 is 1.9272...yes, that's correct--by Fall we have steep discount in the lower 1.90s/gallon. Feb'18 is 1.872, therefore prices are set to sink--not soar--starting now until next Spring.