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How Does A 50 Percent Drop In Gas Prices Sound?

PITTSBURGH (KDKA/CBS) -- Some relief could soon be coming to the gas pump.

In April, AAA reported that the national average for the price of unleaded gasoline was $2.41, the highest yet in 2017. CBS News reports gas prices have been pushing higher since November as the "reflation trade" increased expectations for stronger economic growth. From a low of near $42 a barrel, West Texas Intermediate crude oil reached above $55 between December and February.

But weakness in crude prices have developed as concerns grow about President Donald Trump's legislative push, the viability of OPEC's supply freeze agreement signed late last year (with participation by non-OPEC producers like Russia) and evidence of building supply-demand imbalance with inventories bloated and U.S. shale output ramping up.

The good news is that gas prices may may fall. However, energy shares look set for a sharp move lower, which would be bad news for investors.

Stocks like Exxon Mobil (XOM) could be vulnerable here, threatening to break down below critical support that has been in place since last April as oil stocks first started rising on OPEC deal hopes. All eyes are on the upcoming OPEC policy meeting in May, at which time a decision is likely on a possible six-month extension to the current production freeze agreement.

OPEC has no easy answers. If it continues its output cap, U.S. shale producers will fill the void. U.S. rig counts are up for 14 straight weeks, returning output to levels not seen since April 2015. This is a surrendering of market share, with "data from Saudi Arabia showing a large drop in exports" according to Olivier Jakob from Swiss-based consultancy Petromatrix.

If the cartel ends its production cap, prices could quickly collapse, potentially retesting the 2016 low of $26.05. The fiscal pressure, especially on weaker OPEC members like Iran, would be unbearable.

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For consumers, gasoline pump prices could fall by upwards of 50 percent.

The confusion is palpable based on comments from OPEC and non-OPEC officials. On Tuesday, Saudi Arabian Energy Minister Khalid al-Falih told reporters it was "premature" to talk about a production freeze extension, yet on Wednesday he said an extension may be necessary to reduce oil supply. On Thursday, Russia's Energy Ministry spokesperson said it was too early to consider an agreement extension, while Kuwaiti Oil Minister Al-Marzouk said an extension is necessary.

The agreement between OPEC and non-OPEC nations last year was the first such agreement since 2001. So it's significant that the oil sheiks aren't getting the outcome they desired (namely, higher energy prices and lower U.S. output).

"OPEC is like a magician waving his hands and trying to pull the rabbit out the hat, but still the rabbit isn't there," said Eugen Weinberg, Commerzbank's head of commodities research. OPEC has "done all they can with the production cuts" he added, "and the effect is close to nonexistent."

The outlook is similarly dour for weaker, highly indebted U.S. oil and gas producers. Many of them looked ready for insolvency as energy prices cratered between 2014 and 2016. According to Bloomberg, 20 companies had borrowed more than two-thirds of their credit line limits amid a liquidity crunch last fall. But despite the price recovery since then, at least 11 are still using 70 percent or more of their credit lines.

Should oil prices keep falling, which looks increasingly likely, many of these companies could be pushed into bankruptcy, weighing not only on the share prices of larger energy companies but on bank stocks given concerns over loan losses.

Of course, few consumers would mind what means for the price they pay to fill their tanks.

 

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