Oil prices have entered a sharp decline, hitting their lowest levels in over four years – a development poised to bring welcome relief to American drivers just as the peak summer travel season kicks off.
While challenging for oil producers, the crude market’s recent slump signals potentially significant savings at the gas pump in the coming weeks.
On Monday, the benchmark price for US Crude oil fell another 2%, settling at $57.10 per barrel.
This marked the lowest point for crude since February 2021, a time when the economy was still grappling with the widespread effects of the Covid-19 pandemic.
This significant drop in the primary input cost for gasoline sets the stage for lower retail prices.
Delayed relief expected at the pump
Despite the sharp fall in crude, current national gasoline prices haven’t yet fully reflected the trend.
Data from GasBuddy shows the median US gas price actually ticked up slightly last week to $2.99 per gallon, with the average at $3.12.
However, industry experts explain this is a temporary situation caused by refinery activity.
Patrick De Haan, head of petroleum analysis at GasBuddy, noted that falling oil prices typically translate to lower pump prices, but often with a delay.
“While gasoline inventories have been tightening due to ongoing refinery maintenance — which has limited how much gas prices have fallen in response to lower oil — refinery output is expected to rise soon,” De Haan explained in a Monday note.
He anticipates this maintenance period wrapping up shortly, which should boost gasoline supply and likely cause the national average price “to dip below $3.”
A potential boon for consumer wallets (and the economy)
Lower prices at the pump are invariably welcome news for American households, particularly heading into the summer vacation months when driving increases significantly.
Beyond individual savings, cheaper gasoline can have a broader positive impact on the economy.
Research from JPMorgan estimates that consumers tend to spend roughly 80% of their savings from lower gas prices on other goods and services.
A sustained dollar-per-gallon drop in gas prices can translate into tens of billions of dollars in increased consumer purchasing power annually.
Why crude is crashing: supply up, demand concerns grow
The primary driver behind Monday’s price decline was the outcome of a weekend meeting of OPEC+, a group comprising OPEC members and allied producers.
Eight countries within the group announced plans to increase their collective oil supply by 411,000 barrels per day starting in June.
This planned increase in supply hitting the market coincides with growing concerns about potentially weakening global demand due to forecasts of a slowing global economy.
The combination of more supply and potentially less demand creates classic downward pressure on prices.
Where oil prices might settle: expert outlook
Market analysts believe prices could fall further before finding a floor.
“The solution to low prices is low prices,” remarked Rob Thummel, senior portfolio manager at Tortoise Capital, speaking to Business Insider.
He suggests that persistently low prices eventually force less efficient producers to cut back, reducing supply and allowing prices to recover.
Thummel anticipates oil prices could potentially dip into the low $50s per barrel in the short term before stabilizing within a broader $60 to $80 per barrel range later on.
The economics of oil production support this view. Pumping oil becomes unprofitable for many nations when prices consistently stay below $60 per barrel.
“The IMF estimates the breakeven oil prices needed for OPEC members to balance their budgets is higher than $80 per barrel for most countries except for United Arab Emirates,” Thummel noted.
Extended periods of low prices could thus lead to production cuts, ultimately tightening supply and paving the way for a price rebound.
For now, however, the immediate outlook suggests continued pressure on crude prices, translating into anticipated savings for American drivers filling up their tanks this summer.
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