When Fuel Prices Hit Bottom

Low gas prices are great for in-store merchandise sales while they last. Happy consumers with more money in their wallets are spending that additional money on candy and snacks, made-to-order foodservice, and other food and beverage items at convenience stores.

AAA expects gas prices to remain below a nationwide average of $3 per gallon throughout this year, but of course, this is no sure thing.

On Jan. 29, March futures for a barrel of West Texas Intermediate (WTI) crude oil — considered the benchmark for U.S. oil prices — dipped to $43.76, the lowest level seen since 2009. That same month, a CNBC survey of 33 analysts found that these experts believed crude oil would drop to $40 per barrel before a bottom could be found.

Instead, prices began to rise to more than $50 per barrel. Some analysts think this is what is known as a “short squeeze” and oil prices will drop all the way to $30 to $33 per barrel in the near future, meaning prices at the pump will get much cheaper.

But it’s difficult to see this scenario playing out. Gas prices are certainly unlikely to reach the $3.50–$4 range as in previous years anytime soon, but sub-$2 per-gallon prices at the pump are likely unsustainable as we look toward the future. This is because the environment for low gas prices has been perfect in recent months.

Geopolitical turmoil, a refinery outage in the United States or simply increased fuel demand as the summer driving season nears are just three reasons fuel prices could soon rise. The Organization of Petroleum Exporting Countries (OPEC) decreasing its fuel output is another simple way gas prices would jump.

In fact, we’ve already seen one unexpected event cause oil prices to rise on a short-term basis. Saudi Arabian King Abdullah bin Abdulaziz Al Saud passed away Jan. 22, succeeded by Salman bin Abdulaziz Al Saud. Considering Saudi Arabia is the largest oil producer in OPEC, this has to be considered significant.

Many convenience store retailers have acknowledged they are enjoying the ride while it lasts, including publicly traded companies Speedway LLC and Tesoro Corp. C-store operators are seeing earnings rise substantially, in large part due to low gas prices.

Americans reportedly were saving $630 million per day on gasoline in late 2014, compared to what they paid six months earlier. Spread out over an entire year, consumers would have $230 billion more disposable income.

But nobody expects gas prices to remain low in the long term. Perhaps this is due to multiple experts predicting oil prices will rise this year. Former Royal Dutch Shell plc President John Hofmeister predicted in late January that a barrel of oil will tick up to $80 this summer, more than a 40-percent increase compared to the $45–$50 per barrel seen recently.

Current Shell CEO Ben Van Beurden made similar comments, stating “the fundamentals of supply and demand will reassert themselves” and “oil prices will revert to much higher levels” in the long term. As for what “much higher levels” means, Van Beurden told CNBC a barrel of WTI crude could reach $100 in the near future, about twice the price of recent levels.

OPEC’s Secretary-General Abdulla al-Badri has even loftier expectations for fuel prices. He said on Feb. 3 that oil prices have already bottomed and he believes WTI crude could push its way up to a mammoth $200 per barrel in the future.

LITTLE ROOM TO DROP

Simply put, while it’s hard for oil to go much lower, any piece of news will cause oil prices to spike. For example, WTI crude rose by $3.71 per barrel on Jan. 30 alone, because U.S. drillers said they were trimming back on shale drilling.

All is not lost for some gas station operators, however. One major beneficiary of rising oil prices will be alternative fuels. Although the prices of compressed natural gas (CNG), E15 and E85 still tended to be lower at the pump than traditional E10 even at oil’s lowest point, the price spread narrowed considerably as gas prices plummeted.

As gas prices rise, this price spread will widen, leading to increased demand for natural gas and higher ethanol blends. In the case of natural gas, fleets may resume the process of converting their gas tanks to CNG and liquefied natural gas, a process that has slowed in the past few months.

Like the economy, fuel prices are cyclical. To borrow a scene from a famous fairy tale being released as a new Cate Blanchett film in theaters this month, the clock on bottom-basement oil prices is about to strike midnight. It’s time for Cinderella to leave the ball.

Gas prices are certainly unlikely to reach the $3.50–$4 range as in previous years anytime soon, but sub-$2 per-gallon prices at the pump are likely unsustainable as we look toward the future.