Fuel prices surge to end the year.
Crude oil prices look like they will start 2018 as much as $10 per barrel higher than what many analysts believe is appropriate for an annual average. The US benchmark (WTI) should be above or close to $60 per barrel while Brent crude may be at $66 per barrel or so. It would not be surprising if the numbers witnessed over the first two weeks of January are not repeated for many months in 2018. Global supply and demand balances may indeed be balancing, but the end of the first quarter and beginning of the second quarter often sees supply outpace demand. Every dollar change in the price of crude translates into a 2.4 cents per gal change in gasoline or diesel, and lower crude numbers transition quickly to motor fuel drops this time of year.
Retail gasoline prices currently are approaching $2.50 per gallon, with particular strength in the Northeast and in the upper Midwest. Wholesale prices have rebounded drastically on the West Coast as well. But history suggests that January demand will be more than one million barrels per day lower than where demand was measured in the last two holiday weeks. U.S. refiners have never made this much gasoline in late December, so experts believes that after a mixed start, gasoline will turn lower, particularly in the inland markets.
However, market-watchers see a very robust rally in the spring thanks to reasonably tight supplies; the usual purge where winter gas is flushed from the system and replaced with summer blends; and a fairly hefty schedule of refinery maintenance. This will all coincide with an export market that is much larger than what we’ve ever seen in the past.
February and March will represent the “launching pad” for a rally that might take prices up 40-50 cents per gallon from eventual dead-of-winter lows. For the country, this means that we could see an old fashioned spring rally that takes the national average to $2.75-$2.85 per gallon. For California, the rally begins earlier (in February when summer blend begins to get pumped on the pipeline) and prices are likely to get to $3.25-$3.65 per gallon.
All of this is contingent on continuing economic growth and a reasonable financial backdrop. Should there be a Black Swan event (stock market crash, constitutional crisis, credit freeze) that alters all of the calculus. Similarly, a refinery event (fire knocking out plant or plants) would mean that experts are too conservative in the predictions for a surge.
The weather is frightful and diesel prices have appropriately hit multi-year highs in many parts of the country. We should continue to see diesel prices move up in January, particularly if there is no thaw in the second half of the month.
Still, wholesale prices are about $1 per gallon lower than they were during the 2013-2014 Polar Vortex period and experts don’t expect numbers rallying much more than another 10-20 cents per gallon. Diesel is closing out the year at $2.85 per gallon, but we see a number of locations topping $3 per gallon in early 2018.