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Gas Prices Head Below $1/Gallon As Industry Grapples With Oversupply

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Gas Prices Head Below $1/Gallon As Industry Grapples With Oversupply

The OPEC+ countries are expected to meet today to discuss cutting daily production by 10 million barrels per day as they try to drive the price of oil back up.

At the same time, the US oil industry is slashing prices in an attempt to clear out vast supplies it simply can’t get rid of.

It’s the latest challenge for the US oil industry that is running out of places to store oil while demand falls to multi-decade lows.

Here in the US, wholesale gasoline prices are plunging and are as low as $0.10 per gallon in parts of the Midwest and are only $0.35 per gallon in Los Angeles.

“The sore spots extend from Ohio through to the Great Lakes and all the states that border that, and the Rockies,” said Tom Kloza, head of global energy analysis at Oil Price Information Services.

He added “I’m pretty sure these wholesale prices and spot prices are as low as anything we’ve seen since before the Arab oil embargo” in the early 1970s.

With the US economy shut down and nearly every American at home and not driving or commuting to work, the demand for gas has cratered.

Retail prices are expected to fall below $1 per gallon at the pump in some parts of the Midwest, and could see a national average between $1.25 and $1.50 per gallon very soon.

According to data provided by the Government, we used just 5.1 million barrels a day last week, compared to 9.8 million barrels a day at the same time last year. The last time we used that amount of oil in a week was way back in 1968.

Andrew Lipow, president of Lipow Oil Associates says “We’ve never been in a situation where demand ran into a brick wall and dropped precipitously in such a short time. In other situations, where we had economic shutdowns, we’ve seen a deterioration in demand over time — over months and years.”

Lipow added that he expects to see further production cuts, as the number of places to store oil is quickly dwindling.

“If refineries are only cutting throughput [production] rates 20% to 30%, it’s not enough, and as a rule inventories are filled up to the point where refiners are either going to have to cut additional throughput rates or shut down.”

Kloza, with Oil Price Information Services, says if the cutting the wholesale price isn’t enough to move the gasoline, then shutting down the refineries all together is the next step.

“When you see these discounts and you see these numbers, that tells you they can’t clear gasoline. In the country’s midsection, there is too much gasoline. There is more than 50 days supply there, and they are going to cut refinery runs.”

Kloza added, “It tells you the refineries are in trouble. I personally think there’s a half dozen refineries now that are being reviewed by the companies that run them and they are candidates for closure.”

Typically we would be heading into the busy summer driving season. But with the country shut down, there’s not an opportunity to quickly work through the oversupply.

It’s likely low gas prices are here for at least a few months, no matter what production cuts OPEC+ may agree on today.

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