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Neighbors Growing Together | Dec 8, 2016

US consumers should feel muted impact from rising oil price

Dec 01, 2016

DALLAS (AP) — OPEC’s decision to cut production gave an immediate boost to oil prices, but the impact on consumers and the U.S. economy is likely to be more modest and gradual.

The cartel agreed Wednesday to cut output by 1.2 million barrels a day, reversing a strategy that produced lower oil prices and pain for U.S. drillers but saved money for consumers.

Even if OPEC members carry through on their promises, global oil production would only fall by about 1 percent. There is still more supply than demand — the reason oil prices collapsed beginning in mid-2014.

The agreement has sparked a two-day rally in oil of about 12 percent to above $50. If the price keeps rising, some of the slack from OPEC cuts will be picked up by producers in the United States — good news for drillers and oilfield workers in Texas and North Dakota. President-elect Donald Trump has vowed to increase drilling in the U.S., the world’s third-largest producer after Saudi Arabia and Russia, which would help ensure there is plenty of oil.

In short, analysts say, consumers and businesses are not likely to see the return of $100-a-barrel oil — and the high energy costs that came with it — anytime soon.

Still, there could be some short-term shocks even before OPEC’s cuts take effect in January.

“The average Joe filling up his tank may notice in the next week or two that gas prices move higher by 5 to 15 cents a gallon just on the psyche of the deal,” said Patrick DeHaan, an analyst for GasBuddy, a site used to comparison-shop for gasoline.

The U.S. Energy Department predicts that heating oil costs will rise about one-third this winter, but that prediction was issued more than a month ago and was based heavily on forecasts of much colder temperatures in the Northeast. If the weather forecast proves wrong, prices could sink because heating-oil inventories are running above their 5-year average and grew again last week.

A small increase in gasoline or even a bigger jump in heating oil, which is used in only 5 percent of American homes, won’t affect shoppers if the economy does well, in the view of Michael Niemira, chief economist at The Retail Economist LLC, which does a weekly retail-sales report with Goldman Sachs.

“The consumer isn’t really focused on gasoline since prices remain low. A better economy, a better labor market — those matter much more,” Niemira said. But if gasoline spikes to $4, “that could be bad. “

Crude has traded between $40 and $50 a barrel the last several months. The national average for gasoline today stood at $2.16 a gallon, according to the AAA auto club.

Before the OPEC meeting, the U.S. Energy Department predicted that crude would rise to $50 or $51 a barrel next year.

Sal Guatieri, senior economist at BMO Capital Markets, said modestly higher oil prices will actually help the U.S. economy by spurring investment in the energy industry without draining consumers’ purchasing power. He expects an average price of about $53 a barrel next year as a result of the OPEC production cuts.

“The losers are Europe and Japan — oil-importing regions of the world,” Guatieri said.

U.S. producers are likely to be winners. Drilling fell off after oil prices started to slide in mid-2014. The number of active U.S. drilling rigs bottomed out at 404 in May and has been rising since, to just below 600 last week. That’s still down 20 percent from a year ago, however.

The Federal Reserve Bank of Dallas recently surveyed producers and found that most believe crude must be $55 or higher before drilling picks up significantly, said Michael Plante, an economist for the bank.

The Energy Department predicts that U.S. production will fall from 9.4 million barrels a day in 2015 to 8.8 million this year and 8.7 million next year — the forecast assumed oil at $50 a barrel next year.

Research firm IHS Inc. estimates that if crude rises to $55, U.S. production will instead grow by about 500,000 barrels a day — offsetting nearly half of OPEC’s stated cut.

Much of that production is expected to come from the Permian Basin in Texas, where prices for acquiring oilfield acreage have skyrocketed in recent months. There are now almost as many drilling rigs running in the Permian as in the rest of the country combined, including offshore.

“A few months ago rigs were being stacked on the side of roads,” said Avi Mirman, CEO of Lilis Energy Inc., a small producer that operates in the Permian and the Rockies. “Today it’s almost impossible to get a hot rig” with a crew.

Mirman is facing higher costs for materials used for hydraulic-fracturing or fracking, a technique to boost well production. The specialty firms that do the fracking have raised prices because “they are booked out through June or July. It’s pretty wild.”

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