Rising Fuel Prices & Oil Price Rally
Americans may spend $52 billion more at the fuel pump this year, as global oil producers reduce their output and state taxes rise, according to a study by GasBuddy Organization Inc. The average price of a gallon of fuel may rise to $2.49 this year from $2.13 in 2016, GasBuddy, which tracks retail fuel prices, said in its yearly outlook. The increase takes gas fuel prices to their highest in three years and more than reverses the $39 billion decline in 2016.
“In recent years the ‘price at the pump’ continues to garner more media attention serving as an economic barometer on Main Street that stirs opinions from a broad swath of consumers from coast to coast,” said Gregg Laskoski, senior petroleum analyst at GasBuddy “Forecasting the direction of that ‘barometer’, the potential trouble-spots and how the trends are likely to translate into dollars and cents affords us the opportunity to share insights that help everyone save money, even when fuel prices are climbing.”
The oil-price rally has been driven less by growing demand and more by efforts to rein in production. On November 30, the Organization of the Petroleum Exporting Countries (OPEC) agreed to curb output by 1.2 million barrels per day. The deal came into force at the start of January. It was the first coordinated production agreement in eight years.
Saudi Arabia is planning to cut production by up to 7%, and has already told its clients to expect fewer barrels next month. Kuwait has lowered its output by 131,000 barrels per day.
Non-OPEC countries led by Russia have vowed to cut output by 558,000 barrels per day. The Russians have already lowered their output by 100,000 barrels per day, according to a recent Reuters report that quoted industry sources.
The global pact to lower output has sent crude prices soaring nearly 20% through the new year, with US West Texas Intermediate (WTI) futures hitting 18-month highs. Brent crude barrels, the global benchmark, rose to fresh 17-month highs.
However, the outlook on crude prices is less rosy than the current rally suggests. For starters, it’ll be extremely difficult to police individual member quotas, giving more countries incentive to cheat. Historical mistrust between member states also indicates that the agreement may break down.
Even if we assume that all members comply with the output deal, prices may come under renewed pressure from rising US shale production. The number of active US oil rigs rose for ten consecutive weeks to end 2016, reaching a total of 529. That’s the highest level since December 2015. The rebound in the active rig count shows growing confidence among US producers that current prices are profitable.
Traders looking to navigate the direction of crude futures should carefully monitor the economic calendar for rig counts and weekly inventory data from the American Petroleum Institute (API) and US Energy Information Administration (EIA). Traders should also keep an eye on OPEC’s upcoming meeting on January 21-22, which will attempt to supervise output quotas.
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The oil markets might be volatile for the foreseeable future. As prices rise, so too may US production, leading to fresh fears about a renewed supply glut in the global market. The battle for market share may also influence oil-producing nations that rely heavily on crude production. In this environment, traders should use all the tools available to safeguard against the risks.
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 GasBuddy (January 4, 2017). GasBuddy Forecasts Highest Gas Prices in Three Years for 2017.
 Sam Bourgi (January 9, 2017). “WTI Oil Prices Plunge Amid Signs of Rising US Output.” Economic Calendar.
 Oleysa Astakhova (January 9, 2017). “Russia cuts oil output by 100,000 bpd in early Jan – industry sources.” Reuters.
 Akin Oyedele (January 6, 20170. “US oil rig count rises for 10th straight week.” Business Insider.