Will Gas Prices Keep Rising?
Recent rises in the price of crude oil have also driven gasoline prices higher, to around $3.50 per gallon currently. Despite the recent rally, gas prices might actually be in for a decline in the coming months.
Don't blame OPEC this time...
OPEC's policy to maintain its quota at 30 million barrels per day has driven oil prices higher in the past. But in recent months OPEC's production has increased, mainly due to the slow recovery of Libya's oil production and the sharp rise in Iraq's production. Moreover, OPEC's current oil production is higher than the agreed upon quota: As of February, output reached 31.4 million barrels per day. If OPEC continues to increase its production, this trend could push oil prices lower.
On a global scale, the International Energy Agency projects oil supply will rise by 1.7 million barrels per day during 2014. Global oil demand will increase by only 1.4 million barrels per day. Therefore, the global oil market is expected to loosen in 2014 compared to 2013. This trend is likely to also loosen the U.S. oil market.
According to the U.S. Energy Information Administration's recent weekly update, refinery inputs in the United States have declined by 6.3% year to date to reach (as of last week) 15.112 million barrels per day. The drop in refinery oil throughput suggests the demand for oil has decline in recent weeks.
Looking forward, oil refinery capacity is likely to rise: Leading U.S. refiners such as Valero Energy and Marathon Petroleum are expected to augment their production. Valero Energy is investing in its Gulf Coast refineries, which account for roughly 56% of its total throughput volumes capacity, in order to expand its refining capacity. Marathon Petroleum plans to augment its refining capacity by 50,000 barrels a day by processing oil from Eagle Ford shale oilfields and the Utica field.
Furthermore, the company will increase its capital expenditures during the next three years to $4 billion -- nearly $1.7 billion more than in the previous three years. These developments are likely to increase refinery throughput and thus further loosen the gasoline market.
U.S. oil supply has decreased by a slight 1.1% to 15.3 million barrels per day year to date. Despite this modest drop in oil supply, the oil market is still loose because the supply for oil is higher than the demand. Moreover, the EIA estimated the harsh winter conditions were also responsible for the decline in oil production during the beginning of 2014. As the winter clears out, oil production is likely to pick up.
The colder-than-normal winter has raised the demand for heating oil. This, in turn, has also driven up the price of oil. Looking forward, the EIA projects the demand for liquid fuels including motor gasoline to remain flat during 2014. Since supply is expected to rise and demand to remain flat, the U.S. oil market is likely to loosen, which could bring down gasoline prices (or at the very least keep them from rising any higher).
Bottom line
Even though oil prices are around $100, the oil market is likely to cool down in the coming months on account of the expected rise in production and stable demand. Therefore, gasoline prices are also likely to follow and decline to below the $3.50 mark.
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The article Will Gas Prices Keep Rising? originally appeared on Fool.com.
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