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Gasoline prices likely to remain low this summer

International

Washington - Oil prices continue to lag despite efforts by supply-giants Saudi Arabia and Russia to reduce a stubborn glut in world supplies. That's good news for US drivers looking for affordable gas prices this summer - but not so great for oil companies who rely on robust prices to boost profits.

"If oil prices remain below $50 a barrel, as they are currently, that will keep gasoline prices low," said Pavel Molchanov, an energy analyst at the investment firm Raymond James. "Our team's forecast is for oil prices to recover, not tomorrow or next week, but over the next six to 12 months."

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For now, however, prices have hit a lull, falling nearly 10 percent since the last Organization of the Petroleum Exporting Countries in late May. Another steep drop came Wednesday after two new oil market reports, one showing tepid gasoline demand in the United States and the other showing an increase rather than a cut in OPEC output.

The federal Energy Information Administration on Wednesday said that US gasoline stockpiles rose by 2.1 million barrels to 242 million barrels. For the second week, gasoline demand was weak, disappointing many analysts and traders who had been looking for a rebound. The price benchmarks for crude oil fell sharply after the report's release.

Meanwhile, OPEC, led by Saudi Arabia, has struggled in its effort to reduce output for several months, hoping that it would bolster prices. The Saudi effort comes against a background of the pending public offering by Saudi Arabian Oil Co, known as Aramco. The state-owned oil giant is preparing to go public at a price that could value the company at $1 trillion, making it the most highly valued company ever to hit public markets.

But the International Energy Agency reported Wednesday that rather than falling, the cartel's daily output rose 1 percent to more than 32 million barrels per day. The IEA said that increase was due to higher production in strife-torn Libya and Nigeria, which are not bound by the group's production deal.

Other factors contributing to the oil surplus include increased US crude production, thanks largely to the advances in shale oil drilling methods that include hydraulic fracturing, known as fracking.

US crude oil production is expected to hit 10 million barrels a day next year, which was unheard of just a few years ago when oil prognosticators believed world supply had peaked or was close to peaking. But that was before US shale oil advances kicked in.

Shale oil production accounts for more than half of US production. And it is expected rise by 127,000 barrels a day in shale drilling areas in July, boosting total output from shale to 5.5 million barrels a day. The nation's drilling rig count has more than doubled over the past year.

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Despite an increase in US oil production, some analysts believe the world demand is chipping away at the supply overhang and that an upward arc from today's mid-$40 range is not far away.

"Global demand is growing this year at the same time as global supply is down," Molchanov said. Molchanov said recent US growth in oil production is being offset by steep declines in other non-OPEC countries such as China, Mexico and Colombia.

Many oil companies, particularly the independent shale oil producers who tend to be more nimble than the super majors such as Exxon and Chevron, have learned to earn profits with sub-$50 oil. Still, the shares of those independent drillers tumbled Wednesday as crude prices sank.

A rise to $70 would put profits in companies across the board. It would also boost income for the OPEC and non-OPEC oil exporting countries, many of whom are struggling to balance their budgets at lower oil prices.

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