Analysis: What will happen with gas prices?

DENVER (March 9, 2020) – As crude oil prices tumble to a four-year low amid concerns of a price war among producers and softening global demand, you're probably wondering: What's going to happen to gas prices? While the long answer is increasingly complex and fluid, the short answer is simple: Colorado motorists will pay less at the pump - and perhaps significantly so.

"Historically, this is the time of the year when we see pump prices rise as demand increases and stocks decline. Not this time," said Skyler McKinley, director of public affairs for AAA Colorado. "In fact, just the opposite: The prospects of a massive oversupply coupled with a deep contraction in the Chinese and travel markets should continue to drive pump prices down as we head into spring."

Demand Contraction
Gasoline is refined from crude oil, which trades as a commodity. The trading price of crude oil has declined consistently week-over-week since mid-February - in large part due to the significant contraction of Chinese oil consumption as factories shut down and the country grappled with the Novel Coronavirus. Even as China emerges from the height of the outbreak there, global crude oil demand is expected to fall further as the rest of the world faces economic slowdowns and reduced travel. Barring a significant reduction in crude oil production, falling demand pushes down the commodity's price - which consumers eventually see as savings at the pump.

Supply Shock
Set against this backdrop, the Organization of Petroleum Exporting Countries (OPEC) met last week with nonmember partners, such as Russia, to discuss reducing production to prop up prices. Led by Saudi Arabia, the world's No. 2 oil producer, OPEC proposed reducing production by an additional 1.5 million barrels per day, or 1.5 percent. Of that, nonmembers including Russia – the world's No. 3 oil producer - were expected to shoulder 500,000 barrels of the cuts per day.

Russia rejected the proposed production cuts, and additionally signaled that it did not intend to renew a previous set of cuts that are due to expire at the end of the month. In response, Saudi Arabia announced that it plans to cut prices for its Asian customers while at the same time significantly increasing production. Discounting its prices while flooding the oil market could give Saudi Arabia additional leverage over Russia in production negotiations and expand Saudi Arabian market share as demand dwindles globally. 

What happens next?
The economics are fairly simple: Supply is going to increase significantly (because of Saudi Arabia) even as demand declines (because of the Novel Coronavirus and related economic concerns). High supply and low demand will drive prices downward.

In the short term, then, Colorado drivers can expect gas prices to continue to fall as we enter spring - although the savings might not appear immediately. It can take up to six weeks for lower-priced crude oil to work its way through the refining process and into the tanks at the gas station. Still, for at least the next month, motorists should see regular, week-over-week declines in the per-gallon price of gasoline - and consistent pricing under $2 per gallon is likely. 

In the longer term, however, a lot can happen. Russia may return to the OPEC negotiating table with a willingness to cut production, or Saudi Arabia may back away from its flood-the-market production strategy as revenue decreases. Similarly, Chinese industries may ramp up as the coronavirus outbreak there continues to be contained. Elsewhere around the world, a faster-than-expected recovery from Novel Coronavirus could serve as a shot in the arm to the travel industry. Falling prices could also lead to a reduction in production by the world's largest producer of oil: the United States. Any of these factors could jolt prices upward at about the same time that America would normally enter its summer driving season.

"This weekend's news out of Saudi Arabia should remind everybody how quickly the outlook can change," McKinley said. "For now, motorists should enjoy the savings at the pump with the understanding that what's true today will almost certainly not be the case this time next week."

Colorado Gas By the Numbers

Greeley

• Current Average: $2.17
• Yesterday Average: $2.18
• Week Ago Average: $2.23
• Month Ago Average: $2.45
• Year Ago Average: $2.24
   

Colorado Springs

• Current Average: $2.18
• Yesterday Average: $2.19
• Week Ago Average: $2.26
• Month Ago Average: $2.43
• Year Ago Average: $2.22
   

Denver

• Current Average: $2.21
• Yesterday Average: $2.22
• Week Ago Average: $2.28
• Month Ago Average: $2.42
• Year Ago Average: $2.20
   

Grand Junction

• Current Average: $2.25
• Yesterday Average: $2.25
• Week Ago Average: $2.30
• Month Ago Average: $2.50
• Year Ago Average: $2.34
   

Boulder-Longmont

• Current Average: $2.25
• Yesterday Average: $2.25
• Week Ago Average: $2.29
• Month Ago Average: $2.46
• Year Ago Average: $2.24
   

Fort Collins-Loveland

• Current Average: $2.32
• Yesterday Average: $2.34
• Week Ago Average: $2.40
• Month Ago Average: $2.52
• Year Ago Average: $2.25
   

Pueblo

• Current Average: $2.34
• Yesterday Average: $2.35
• Week Ago Average: $2.37
• Month Ago Average: $2.42
• Year Ago Average: $2.30

Durango

• Current Average: $2.40
• Yesterday Average: $2.41
• Week Ago Average: $2.40
• Month Ago Average: $2.53
• Year Ago Average: $2.35
   

Glenwood Springs

• Current Average: $2.56
• Yesterday Average: $2.61
• Week Ago Average: $2.63
• Month Ago Average: $2.76
• Year Ago Average: $2.48
   

Vail

• Current Average: $2.74
• Yesterday Average: $2.76
• Week Ago Average: $2.81
• Month Ago Average: $2.88
• Year Ago Average: $2.66