AAA reports that the average price for regular gas at the pump hit $3.825 on August 9, the highest level seen in 2023, amid growing concerns that global oil markets are undersupplied by as much as 2 million barrels per day (bpd). In contrast to the dramatic spike of almost $2.00 per barrel seen in 2022, when the gas price hit an all-time high of $5.11 in June of that year, 2023 has seen a slow and steady rise of about $.80 per barrel since January 1.
As is almost always the case, the runup in gas prices can be linked to a simultaneous increase in crude prices, as the international Brent index has jumped by about 18% since mid-June. The Brent and domestic WTI prices rose again overnight even in the wake of seemingly bearish news from China, which reports that its own crude imports dropped by 18.8% month-over-month during July. That indicates that the robust Chinese economic growth rate of 6.3% seen during April and May could be slowing down, stalling crude demand in the world’s largest oil-importing nation. China ranks as the second-largest consumer of crude oil behind on the U.S.
China had reported June imports of 12.67 million bpd, an all-time record high for that country, but said its imports fell to 10.29 million bpd in July. At the same time, though, China’s refineries saw a rise in processing rates from 78% to 82%, not indicative of any economic slowdown. As is always the case with China, it is risky to look at a single month’s data point as any sort of trend, and the continued rise in crude prices seem to reflect that sort of reaction by the market.
It seems that price signals sent in July by Saudi Arabia and other OPEC+ countries are continuing to overwhelm this news from China and any other bearish market factors. Saudi Arabia implemented a voluntary cut in exports of 1 million bpd on July 1, as other OPEC+ members combined for another half-million barrel cut, and the rise in crude prices has corresponded to that action. While some analysts had expected Saudi ministers to end that country’s voluntary action at the end of August, Saudi representatives announced last week that they planned to keep the same export levels in place through at least the end of September.
At the same time, a general consensus has formed among analysts that global markets are undersupplied by as much as 2 million bpd. Thus, even if the Chinese economy is slowing – a notion that will either be confirmed or debunked over time – that is a sizable deficit to work down without an increase in OPEC+ exports.
There is little chance of U.S. shale production rising rapidly to help work the deficit down. Both the Baker HughesBHI +1.6% and Enverus domestic rig counts have continued to drop, with Baker Hughes reporting decreases in active drilling rigs in 18 of the last 19 weeks, and the Enverus count falling by over 20% since mid-January. With 2nd-half drilling budgets at corporate producers now set for the rest of the year, there seems little prospect for a reversal of that trend.
Karr Ingham, the Petroleum Economist at the Texas Alliance of Energy Producers who has published the Texas Petro Index over the past 20 years, reported Tuesday that the industry in Texas, where more than 40% of U.S. oil is produced, remains at healthy levels, but month-over-month growth during 2023 has been slow and sporadic. Texas hit an all-time record high production level of 5.49 bpd during May, but then slipped slightly in June along with the rig count.
“Texas daily crude oil production topped out at 5.45 million barrels per day in March 2020 and then dropped by 1.22 million bpd in April and May in response to sharp demand declines and crashing prices,” said Karr Ingham, Alliance Petroleum Economist and the creator of the TPI analysis. The strong recovery in May production represented a full recovery in the state’s production since the Covid crash hit in April, 2020.
The Bottom Line
Gas prices at the pump seem poised to remain on the current upwards trend through at least the end of September, and potentially longer than that should Saudi Arabia and other OPEC+ countries decide to keep current export levels in place beyond September 30. The one potential saving grace for U.S. gas consumers is that summer driving season is about to end, causing domestic gas demand to drop.
But whether that seasonal factor can offset global price pressures is anyone’s guess. For now, drivers are left to search for the best bargains they can find and go on about their business.
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