September 9, 2020

Gasoline prices at the retail level fell $0.01 in the week ending September 7 to $2.21 per gallon.  After hitting bottom at $1.77 in the week of April 27, gasoline prices have been rising steadily.  In South Carolina gasoline prices tend to about $0.25 below the national average or about $1.96  The EIA expect gasoline prices to average $2.16 per gallon this year so, if they are right, prices should be relatively unchanged in the final three months of this year.

Crude prices declined about $6.00 in this past week to $37 per barrel.

The reason prices fell in March and April is primarily because the corona virus caused global economic activity to come to a screeching halt.  Demand dropped abruptly (the yellow line below), but production did not decline as quickly (the green line).   As a result, supply exceeded demand by about 7.0 million barrels per day in the second quarter (the blue bars).  However, in the third and fourth quarters global production should rebound by less the increase in demand, which means that those inventory levels will get reduced.

In recent years fracking and horizontal drilling have dramatically boosted U.S. production to 13,100 thousand barrels per day.  But given the drop in the global economy and in the demand for oil, production has finally begun to drop to 10,000 thousand barrels per day in the most recent week.  It should stay at that reduced level a while as producers try to get inventories back into closer alignment with demand.  But as the global economy recovers the demand for oil will eventually rise.  But before production can pick up significantly, inventory levels will have to be reduced.

In the U.S. inventory levels rose sharply during the recession which is why U.S. producers have been sharply curtailing production.  As the global economy recovers those bloated inventory levels have begun to shrink.

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Stephen Slifer

NumberNomics

Charleston, SC