Are Gas Prices Going To Plunge This Summer?


[credit provider=”shahram sharif on flickr”]

People are impatient.Oil prices had one ugly day, and already people are openly wondering when they’re going to see lower prices.

Well, at a minimum it will take a while before these prices actually filter through, but obviously the bigger question is whether they’ll be down significantly this summer.

At this point, nobody is betting on that.

Nomura’s Andrew Lo just put a $110 /barrel target on crude noting increased demand, ongoing supply disruptions, and acute demand from Japan. The loss of nuclear capacity in Japan increases the demand for petro-chemicals, and just today, Japanese PM Naoto Kan announced more temporary shutdowns of nuclear plans.

Also, unfortunately, there’s just no way to make up for the big, ongoing shortfall out of Libya, as seen here:

oil libya

[credit provider=”Nomura”]

As this chart indicates, OPEC spare capacity — the cartel’s ability to lift output —  as a percentage of demand is zooming towards multi-year lows.

OPEC oil

[credit provider=”Nomura”]

Goldman’s David Greely made a similar comment in a note this morning. Despite the sharp drop, the fundamentals remain toward higher prices:

It is nevertheless important to reiterate that while we saw recent prices as having risen above the levels consistent with underlying near-term supply- demand fundamentals, we continue to believe that the oil supply-demand fundamentals will tighten further over the course of this year, and likely reach critically tight levels by early next year should Libyan oil supplies remain off the market. Consequently, it is important to emphasise that even as oil prices are pulling back from their recent highs, we expect them to return to or surpass the recent highs by next year.

Here’s the rub. Prior to the breakout of the Libyan crisis, oil was already at around $90/barrel (today it’s just over $102), so even if the entire Mideast premium came out, we’d still be at elevated levels.

The only way oil is likely to decline much further than that is if the economic data got much worse. In that case, gas prices might be much cheaper, but… you’d be more likely to be out of a job, and not driving anywhere this summer.

Pick your poison.

See also: An updated list of signs that the economy is sharply slowing down >