Will gasoline prices go lower this winter?
Is the plunge in gasoline prices over?US motorists may find slightly cheaper fuel as winter approaches, but there is a good chance that pump prices, now averaging $2.22 a gallon nationwide, are close to a bottom for the year, analysts say.
After a 27 percent decline from the summertime peak of $3.04 a gallon, the average retail price of gasoline in the US rose last week for the first time in almost three months, according to the Energy Department. Moreover, in the past month there has been a levelling off of futures prices for gasoline to be delivered at the end of 2006 and early in 2007 — a sign of what's to come at the retail level.
A variety of factors have helped to establish a floor underneath retail gasoline prices, analysts said.
Oil prices are proving to be sticky around the $60 a barrel level following a decision by the Organisation of Petroleum Exporting Countries to rein in output. Demand for gasoline continues to rise in spite of today's high prices. And refinery capacity remains tight, forcing the US to import more fuel than ever before at a time when demand is also on the rise in countries such as China and India.
"You've got a pretty decent case for gasoline prices to rebound," said Citigroup analyst Timothy Evans. "I don't know that we've got 50 cents (per gallon) to the upside. But could there be 20 cents? Sure."
Evans, who has been bearish on petroleum prices all year, said his change of opinion is mainly due to OPEC's recent pledge to reduce its production by about four percent. Many analysts are dubious the cartel will remove 1.2 million barrels a day from the market, as promised, but Evans said he believes the cartel is serious about mopping up surplus crude supplies.
"I'm willing to be bearish, but I'm not always willing to bet against producers representing 35 percent of the market," he said.
While there are divisions within OPEC about what constitutes a fair and sustainable world oil price, analysts believe OPEC is trying to keep prices from falling below $55 a barrel.
Of course, this widespread conviction among traders has helped stabilise prices at a somewhat higher level. On Tuesday, oil futures for December delivery traded near $58 per barrel on the New York Mercantile Exchange.
The impact a cold winter would have on gasoline prices is hard to say. On the one hand, wintry weather is likely to boost the price of heating and natural gas, keeping upward pressure on the price of oil — and, ultimately, gasoline. However, lots of snow could keep drivers inside and that would dampen demand.
"I think we're going to see some choppiness in pump prices for the next few months," said Alaron Trading Corp. analyst Phil Flynn. But based on seasonal patterns "the big drops are pretty close to being over," he added.
Based on historical patterns between 1980 and 2002, an oil price of around $60-a-barrel translates to $2.15 at the pump, according to Tom Kloza, director of Wall, New Jersey-based Oil Price Information Service. But in recent years prices have traded at premiums to historical averages due to strife in the Middle East, hurricanes and scant excess refining capacity, adding as much as a quarter per gallon.
"A lot of investment in the downstream sector is expected in the next few years," said Fimat USA analyst Antoine Halff, referring to the side of the oil business that deals with refining and marketing fuels. "But those investments haven't come on stream yet."
The unleaded gasoline futures contract that has been bought and sold on Nymex since 1983 traded on Tuesday at $1.40 a gallon, down from an August peak of $2.34 a gallon. At year's end, however, this contract will be replaced by another as a result of changing environmental regulations. The new contract, known as the reformulated gasoline blendstock for oxygen blending, or RBOB, traded Tuesday at $1.46 a gallon for fuel to be delivered in December. RBOB to be delivered in January traded at $1.52 a gallon.
"We're priced right now for the bottom of the cycle," Evans said.
