Oil Glut Ignites Gasoline Price Swoon

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from The Wall Street Journal,

Pump prices in September are at lowest level in four years as the US feels effects of a shale boom.

Gasoline prices have tumbled from highs hit in June. And markets are signaling that consumers will get even more relief at the pump.

A global glut of crude oil is the main driver behind the decline in gasoline. Relatively cheap oil has made it more profitable for refiners to produce gasoline and other fuels, and they have ramped up production to record levels.

This boom in supplies has sent gasoline prices tumbling. Traders and other market observers expect the flow of both crude oil and gasoline to keep rising, likely exerting more downward pressure on prices.

The average retail price for a gallon of regular gasoline was $3.42 on Thursday, down 3.8% from the same period in 2013, according to motor club AAA. For this time of year, gasoline prices are at their lowest level in four years.

“We certainly have plenty of crude-oil supply over the next couple of months and plenty of products,” said Andy Lipow, president of consulting firm Lipow Oil Associates in Houston. “I’m expecting the national average to drop to $3.15 by Halloween, and $3 a gallon as a national average is certainly in the cards.” Analysts at AAA predict prices could fall another 15 to 20 cents by the end of October.

A sustained period of relatively low gasoline prices could help bolster the consumer-driven U.S. economy, which has posted wobbly growth this year. Many policy makers remain concerned about the outlook, with a disappointing August jobs report adding to jitters. By paying less at the pump, consumers could use the cash to make other purchases.

Retail gasoline prices often fall as summer vacation winds down, but the speed and size of the recent decline underscore shifts in energy markets that many analysts expect to be lasting.

Trading in futures markets indicates that gasoline retail prices have further to fall. Gasoline for October delivery, the front-month contract, on Thursday slipped 0.24 cent, or 0.1%, to $2.5241 a gallon, a 10-month low. During intraday trading, prices dipped into bear-market territory, defined as a 20% drop from a recent high.

To be sure, tensions in the Middle East could cause oil prices to spike as they did in June when Islamist militants swept through northern Iraq. On Wednesday, President Barack Obama authorized airstrikes in Syria and expanded a bombing campaign in Iraq. Higher oil prices could discourage refiners from producing as much gasoline, which would constrain fuel supplies and support prices, some analysts said.

Moreover, unforeseeable events, such as a hurricane or refinery disruption, could send gasoline prices higher, they added. And because gasoline, unlike most forms of crude oil, can be exported, strong global oil-product demand could also lift prices.

Retail gasoline prices have held in a range of between about $3.25 and $4 a gallon in the past three years, said Kevin Logan, chief U.S. economist at HSBC.

“We’re not really out of the range we’ve been in for the last several years,” said Mr. Logan. “There will be a benefit to consumers, but no more than the year before.”

U.S. gasoline production usually dips in September and October, as refineries shut units to perform seasonal maintenance.

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