Prepare to pay more at pump
Global uncertainties point to higher prices
A new U.S. president, global politics, a jaw-jabbering oil cartel, the largest initial public offering of stock ever and unanswered questions about U.S. crude oil production in 2017 are all contributing to a combustible forecast for gasoline prices this year.
About the only thing that market watchers seem certain of is that we’ll be paying more for gasoline in 2017.
“The list of factors being mixed into the yearly forecast has never been larger,” Patrick DeHaan, senior petroleum analyst for fuel monitoring service GasBuddy, said in a statement. “Forecasting fuel prices, especially this year, remains a challenging balance of science and art.”
GasBuddy is forecasting the average cost for regular gas will
jump to $2.49 per gallon this year, up from $2.13 in 2016.
Expect the usual price run-up when the Upper Midwest is forced to switch to more expensive summer blend gasoline to meet federal clean air mandates, GasBuddy said.
On Wednesday, the national average price for a gallon of regular was $2.35, compared with $2.18 a month ago and $1.99 a year ago, according to auto travel organization AAA.
The average price for Wisconsin is $2.37, with the Milwaukee-Waukesha metro average at $2.38.
The price of benchmark West Texas Intermediate crude oil closed at $53.35 per barrel on Wednesday. A year ago it was $36.81.
A wide range of factors is shaping the oil markets.
The most recent news is that the OPEC oil cartel says it will lower production
in an attempt to drive up prices. Market pros say they would be surprised if all the members of the cartel actually stick to the production cuts.
“They are going to cheat like they always do,” said Jim Ritterbusch, president of Ritterbusch & Assoc., an oil trading and advisory firm in northern Illinois. “Coming out of the gate this month with production cuts, you’ll see fairly strong compliance, maybe 80%,” of the cartel sticking to the cuts.
“I think by March that tapers down to about 60%. That could end up taking about half as much oil off the market as they suggested, assuming Russia cheats as well.”
Almost all of this hinges on the ulterior motives of Saudi Arabia.
“We finally believe the Saudis will cut output for one simple reason: they are planning the IPO of Saudi Aramco in 2018,” Ethan Bellamy, managing director and petroleum industry analyst at Milwaukee-based Robert W. Baird & Co. Inc., said in an email.
Saudi Aramco is the state-owned oil company in Saudi Arabia.
“In our view they have both the means and the incentive to drive oil prices higher ahead of floating what will be the biggest public company in history,” Bellamy said. “We are talking a market capitalization in excess of $1 trillion potentially, depending on how it is structured.”
However, as oil prices rise, U.S. shale producers will jump back into the market, Bellamy said.
“U.S. production will turn around, but not quickly enough to overcome cuts from OPEC,” Bellamy said. “If you buy gasoline, pray that I’m wrong. But in case I am correct, plan on gasoline and diesel prices rising this year.”
U.S. shale production is among the biggest wild cards in the equation.
“I don’t think (the Saudis) have a really good gauge on what U.S. producers are going to do,” Ritterbusch said. “Nobody does . ... The shale brings a whole new element to the table.”
Then there is the matter of President-elect Donald Trump’s administration.
“Generally, Trump is going to come out of the gate — I think — deregulating a lot of energy rules and regulations,” Ritterbusch said. “Over the long term, that will be bearish for prices — U.S. production will lift up even more.”
Look for OPEC to continue trying to talk up crude prices.
“OPEC is going to be hyping this thing up for a few months,” Ritterbusch said. “They are going to be out there with their flow of rhetoric every time the price dips . ... OPEC chatter can go a long way in boosting prices, and we’re going to see more of it.”
Which brings us back to pump prices for 2017.
“We’re not going to see runaway gasoline prices or anything,” Ritterbusch said. “But your prices in Milwaukee might advance 25 cents a gallon between now and the spring fairly easily.”
“The silver lining here is that unless we see a black swan event, we won’t return to $100 (a barrel) oil anytime soon,” Bellamy said. “U.S. fuel costs will remain a bargain compared to the last decade.”