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home : news : news January 19, 2019

1/2/2019 9:11:00 AM
Gas Prices Lowest In Three Years

Wayne Howard
Staff Writer

I was wrong.  Having watched oil prices carefully for over a quarter of a century, I believed that prices would stabilize in 2018--and I said so on more than one occasion.  I predicted a stable price of about $80 a barrel, and until early October, that prediction--although slow in coming--appeared to be on target.

I wasn't alone. Wall Street predicted oil would surpass $100 for the first time in four years last year.  The oil market instead experienced its worst annual loss since 2015. Prices plunged 33% in the final quarter, dropped 20-25 percent for the year.  

In an article in late November, I took issue with President Trump's assertion that he was responsible for the lower gas prices.  Some (mistakenly) said I was inserting political opinion into the article.  So what, if anything, did Trump have to do with what has happened?

In May of last year, the Trump administration restored sanctions on Iran, OPEC's third-biggest producer, raising concerns about a supply squeeze in the oil market. OPEC then decided to restrict supply. At Trump's urging, Saudi Arabia increased its production, adding another million barrels per day to the supply; but that was in late May--and the glut continued to build through November.  There was no easily understandable reason why the market would suddenly decide to address the over-supply in October.  

I've pointed out before that US oil production from fracking costs less now than it once did.  For existing operations, oil companies can make money with $40 a barrel oil--but they need $50-55 per barrel to fund new operations profitably.  The price of US crude is currently just under $50 a barrel while Brent crude is still trading closer to $60.  

Most of the 'experts' are now predicting that prices later this year will increase--the majority seem to favor $70 per barrel although the Energy Information Administration pegs its prediction at $61 per barrel.  

Nothing is certain, of course.  In an early December meeting, OPEC and some non-OPEC countries agreed to take about 1.2 million barrels a day off the oil market starting in January. If they don't continue that cut, the price could stay as low as it is now.  

US oil producers have also begun to cut back on their expansion plans.  That will also likely help to boost prices.  

The price of crude ranged from just over $45 a barrel for US crude to just under $55 a barrel for Brent crude in Wednesday trading.  

So if gas prices are lower, why isn't that true of propane?  The easy answer is that propane doesn't come from crude oil--it's a by-product of natural gas production.  North Carolina's average residential price for propane is currently about $2.85 per gallon.  That's about ten cents less than it was last year at this time.  [Prices vary by dealer.]

So what's ahead?  Gas prices WILL (almost certainly) go up this year--most likely to about $2.75 per gallon in late Spring and early Summer.  Just as we were surprised with the less than $2 per gallon that we predicted we wouldn't see in 2018; we'll be VERY surprised if the price gets to $3 a gallon any time this year. 

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