Analyst on Gas Prices: 'Enjoy Drop While It Lasts'

CARS.COM — Pump prices fell again the past week as crude oil and gasoline inventories in the U.S. continued to increase, negating production cuts by the Organization of Oil Producing Countries. The national average for regular gas fell 3 cents the past week to $2.33 a gallon, the AAA Daily Fuel Gauge Report said Thursday.

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Motorists in the Great Lakes area saw bigger declines sparked by a growing supply, reduced demand and an intense price war among brands. Premium gas fell 2 cents a gallon to $2.81 and diesel fuel by a penny to $2.53.

Demand for gas is lower during the winter, and the Energy Information Administration reported that crude oil inventories were 5 percent higher than a year ago, and gasoline inventories 2 percent higher. The Midwest had the biggest jump in gasoline inventories, resulting in the biggest price declines at the pump.

Average prices for regular fell by 7 cents the past week in Illinois and Indiana, 10 cents in Michigan and 11 cents in Ohio, the third week in a row prices have fallen in those states. Over the past three weeks, prices have plunged by 26 cents in Ohio, 28 cents in Indiana and 29 cents in Michigan.

Those dramatic price drops won’t last, Patrick DeHaan, a senior analyst with GasBuddy.com, said in a blog post. Stations are competing for business by undercutting each other to the point they are losing money, and they will soon raise prices, he said.

In some areas, such as central Indiana, he predicted prices could jump up as much as 60 cents a gallon. Regular was as low as $1.70 in the Indianapolis area early Thursday. (Prices fluctuate throughout the day and could change.)

“These deep discounts are usually temporary and trigger several stations to adjust prices to stop the bleeding. The likely jump will be significant for stations selling at the lowest prices, as they’re losing the most money,” DeHaan said. “It’s likely they’re selling somewhere (between) 20 (and) 40 cents per gallon under cost to stay competitive, but that hemorrhaging will soon end and the stations will restore some measure of sanity.”

With a statewide average of $2.08 a gallon for regular, Indiana had the second lowest prices after South Carolina, where the average was $2.06, according to AAA. Ohio was third lowest at $2.09, followed by Alabama and Tennessee at $2.10.

The highest prices were in states on the Pacific Ocean: Washington, $2.74; Alaska, $2.78; California, $2.79; and Hawaii, $3.07. The average price for regular was more than $2.50 in Oregon, New York, Pennsylvania and the District of Columbia.

Gas prices started to rise in early December after OPEC announced plans to cut oil production starting Jan. 1. Oil prices rose as a result, and on Thursday, U.S. crude was trading at around $53 a barrel, about $10 more than in late November. The increase in oil prices has encouraged U.S. and Canadian producers to expand their production and add 35 new drilling rigs in recent weeks, offsetting some of OPEC’s lower production.

“The introduction of these new rigs brings the total U.S. rig count to 694, which represents a significant increase in output counteracting OPEC’s production cut, AAA said in a release.

DeHaan noted that the bloated inventories of gasoline are for winter blends that will need to be sold off at discounts to make room for summer blends of gasoline that refiners switch to in the spring. The wholesale discounts on winter gas should lead to lower prices at the pump until the arrival of summer blends, which are more expensive to produce.

“Refiners move lower-spec winter gasoline out of the system by offering temporary discounts, which is why motorists should enjoy the drop while it lasts,” he said.