Several gas stations in Edmonton, Canada, are selling unleaded regular gas at 93.9 cents per litre, the cheapest price since January of 2013, as the global oil supply-demand equation changes, causing a decline in the price of crude.
Gas prices in the country have been dropping at an average of 11 cents per litre, a trend that started in September after an annual high was recorded in June by the Kent Group. The decline is in accordance with the plunging price of West Texas Intermediate (WTI) crude index.
WTI traded at its lowest level in four years, dipping below $75 per barrel this week. In June WTI had recorded a high of $107 per barrel.
The retrenching price of crude benchmark is not surprising, given that members of the Organization of Petroleum Exporting Countries (OPEC) have excess supply and the United States is producing more oil in recent years.
OPEC Excess Supply and Low Prices
Members of OPEC—namely Iraq, Saudi Arabia, Kuwait and Iran—cut their prices in October, which pushed global oil prices down. The concurrent increase in output resulted in a situation of excess supply. OPEC accounts for 40% of the world’s total crude oil supply.
The price cuts have resulted in speculation that OPEC members are struggling to sell their oil as supply outweighs demand for oil products.
Signs of a slowdown in world demand for oil have been evident in recent weeks, but OPEC members have refused to lower production. A Bloomberg survey had determined that OPEC produced roughly 30.974 million barrels per day last month. Bloomberg also estimated that OPEC’s output increased to a 14-month record high in October.
For his part, Iraq’s Oil Minister, Adel Abdul Mahdi, has admitted recently that OPEC members are trying to defend their market share and are already engaging in an internal “price war” due to the market’s excessive supply.
US Cuts Oil Imports as Domestic Supply Increases
The US, which had imported oil heavily in the past, has been a big factor in the ongoing “price war” among the Middle East’s oil-producing nations.
For example, the US reduced its purchase of oil from Saudi Arabia to 609,000 barrels per day during the first week of October, based on data made available by the Energy Information Administration (EIA). This was the lowest weekly level since June 2010 as the US was still emerging from the great recession. While significant, some caution should be exercised, as the weekly data can be quite volatile.
The US is importing less oil since its domestic supply has surged. US oil output increased by 0.4% to 8.97 million barrels a day during the week of October 24 and to 9.06 million during the week ending November 7 based on EIA estimates. Lower operating efficiency has been recorded among US oil refineries over the last few weeks.
These refineries are operating at their lowest level since March of this year. In the week ending October 24, the refineries operated at 86.6% of their operating capacity, per EIA data. The lower operating efficiency was due to maintenance scheduled by oil refiners for September and October, to prepare for the shift from summer fuels to winter fuels.
Companies that refine crude into finished products have benefited from the lower price of crude input. Investors in the energy sector are likely to fare better with companies that can capture such value throughout the energy chain.
In the US, regular gasoline prices fell below $3 per gallon in the week ending October 31, a first since December of 2010.