As the new year began, oil prices quickly leaped from the high-$40’s per barrel to just over $52.  For the remainder of January, prices remained at that level as they traded within a narrow range. The following graph shows the daily price movements over the past three months:

The jump in oil prices at the start of January continued to be driven by optimism related to the distribution of several COVID vaccines.  Oil and fuel prices have increased in anticipation of greater demand that will accompany a resurgence in economic activity after wide-spread inoculations have been completed. 

A little more than a week into January, oil prices flattened as vaccine supply constraints significantly limited the pace of distribution.  In addition, news of virus mutations raised concerns about the efficacy of the vaccines.  The combination of the hobbled pace of the vaccinations along with the uncertainty caused by mutations dampened traders’ optimism.

Due to the increase in oil prices during the early part of January, the overall average price for the month was higher compared to the prior month.  Wholesale and retail prices for refined fuels also moved higher.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

Wholesale and retail prices moved upward in sync for diesel so retail margins were unchanged.  For gas, the increase in retail prices continued to lag wholesale causing retail margins to fall to their lowest levels in over a year.  The following graph shows the retail margins over the trailing 15 months:

Sokolis Group anticipates oil prices will continue to trade in the low-$50’s/barrel as long as progress continues to be made with the rollout of the COVID vaccines.  If mobility improves along with demand for fuel over the next few months, prices are likely to continue rising through the $50’s and could break through $60 later in the year.

Oil prices continued to increase throughout December and gained another 7% following a sharp increase during November.  Prices ended the year near $50/barrel but remain about 20% lower from where they started the year.  The following graph shows the daily price movements over the past three months:

The continued rise in prices during December was primarily driven by optimism as the distribution of several COVID vaccines began.  While only a small fraction of vaccinations had been completed by the end of the month, rollout plans indicate a much larger percentage of the population will be inoculated over the next several months.  Oil and fuel prices have increased in anticipation of greater demand that will accompany a resurgence in economic activity.

In addition to the positive impact of the vaccines on future demand, prices were also supported by OPEC’s decision in December to continue limiting production of oil, although not quite as restrictive as their previous limit.  Prior to OPEC’s meeting, there were some concerns that existing production limits would expire and a rapid increase in supply might occur during a period of weakened demand.  OPEC decided to extend the restrictions again in early January with a slight increase to the limit.  However, Saudi Arabia followed that meeting saying it would voluntarily reduce production effectively allowing other members to increase production while maintaining the overall limit as a group.

Due to the rise in oil prices throughout December, the overall average price for the month was higher compared to the prior month.  Wholesale and retail prices for refined fuels also moved higher with oil.  However, the upward slope for retail prices was slightly lower as merchants hesitated to pass through increasing costs during a period of lower demand.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

Since the increase in retail prices lagged wholesale for refined fuels, retail margins declined slightly in December.  Despite the decline, margins are still within their historical typical ranges.  The following graph shows the retail margins over the trailing 15 months: 

As we continue into the new year, Sokolis Group anticipates oil prices will continue to trade near $50/barrel.  This assumes there are no major setbacks with rolling out the COVID vaccines, and no new mutations of the virus are resistant to the vaccines.  Further price increases are anticipated as wide-spread inoculations enable greater mobility and demand for fuel.

As demand improves, OPEC and US shale companies will continue to reevaluate their production levels as they anxiously look for opportunities to increase production.  Additional supply in the market will help offset demand growth which will moderate prices.  Nevertheless, the potential exists for oil to continue rising through the $50’s and approach $60 later in the year.

Oil prices increased sharply in November, rising over 25%.  The month began with prices just under $36/barrel and ended slightly over $45.  The following graph shows the daily price movements over the past three months:

The rise in oil prices started early in November after published test results for two COVID vaccine trials reflected very high efficacy.  Despite a global surge in virus cases throughout November, gains in oil prices and financial markets were driven by optimism that these vaccines could be approved and distributed soon. 

Due to the growth in oil prices throughout November, the overall average price for the month was modestly higher compared to the prior month.  Despite the increase in oil prices, retail prices for refined fuels were slow to react as diesel prices remained flat while gas declined slightly.  Wholesale prices for diesel did show an increase in response to the rise in oil coupled with strengthening demand.  However, wholesale prices for gas declined further as demand continued to be soft along with a seasonal decline.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

As a result of retail prices lagging wholesale for diesel, retail margins declined significantly and returned to a more typical level not seen since the end of last year.  Retail margins for gas only showed a slight decline as retail and wholesale prices moved in sync.  The following graph shows the retail margins over the trailing 15 months: 

Looking toward the start of next year, Sokolis Group anticipates oil prices will continue to move upward through the $40’s.  Prices could even rise above $50/barrel barring any major setbacks with rolling out the COVID vaccines.  The recent increase in prices reflects how markets anticipate global economic activity and demand for oil will improve next year.  Further increases may not come until several months into next year assuming a clear trend emerges showing the virus subsiding as inoculations roll out. 

Meanwhile, OPEC+ has been adjusting their production levels throughout this past year in response to the weakened global oil demand.  A previously agreed upon production increase was originally scheduled for January 2021 but will likely be postponed for several months since COVID restrictions continue to negatively impact demand.  If OPEC+ decides to increase production around the 2^nd quarter of next year assuming demand grows, it could moderate the potential for significant prices increases.  Nevertheless, as a far-sighted prediction, the potential for oil to reach $60/barrel by the end of next year, roughly a 30% increase from current levels, seems plausible.

Oil prices fell by 11% during October, from a starting point near $40/barrel.  Shortly after the month began, prices dropped to $37 followed by a quick recovery toward $41.  However, the momentum was lost during the second half of the month as prices declined sharply to close the period under $36.  The following graph shows the daily price movements over the past three months:

The volatility of oil prices and financial markets continues to be driven by COVID-19 concerns.  During October, virus cases surged around the globe and new lockdowns were implemented in many countries.  Although the US also experienced a large increase in daily cases, wide-spread lockdowns had been avoided.  However, increasing cases coupled with US legislators’ inability to reach a compromise on a stimulus package raised concerns about the near-term future of the economy and demand for fuel. 

Despite the volatility of oil prices during October, the overall average price for the month was just under $40/barrel which was relatively flat compared to the prior month.  Wholesale and retail prices for refined fuels did not show any significant changes either.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

Retail margins for October reflected some small changes with diesel margins declining slightly while gas increased.  The following graph shows the retail margins over the trailing 15 months:

For the remainder of this year, Sokolis Group anticipates oil prices will trade in the mid- to high-$30s per barrel based on the continued uncertainty about COVID-19’s economic impact.  The potential for prices to decline even further is possible as restrictions expand to fight the virus.  However, several vaccines are nearing the end of their test phase with a chance that at least one could obtain approval for distribution before the end of the year.  If any of the vaccines are approved, oil and fuel prices could rise based on optimism that economic activity and demand for fuel will improve.

Oil prices showed some volatility during September after several months of trading in a tight range.  Shortly after the start of the month, prices fell by more than 10%, dipping just below $37 per barrel.  Within a week, prices managed to climb back to the familiar $40 level and stayed nearby for the remainder of the month.  The following graph shows the daily price movements over the past three months:

The large decline at the beginning of September was accompanied by similar weakness in the financial markets. The primary factors driving the volatility were a rising number of global coronavirus cases along with uncertainty about US legislators’ ability to broker a deal for additional economic stimulus. 

As a result of the movement in oil prices during September, the overall average price for September declined slightly compared to August.  Wholesale prices for refined fuels also reflected small declines while retail prices remained steady.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

Retail margins increased in September as wholesale prices declined while retail prices were flat.  The following graph shows the retail margins over the trailing 15 months:   

For the remainder of this year, Sokolis Group believes oil prices will hover near $40 per barrel.  This is primarily based on the continued uncertainty about COVID-19’s economic impact.  Weakness in fuel demand, particularly for diesel, will likely prevent any appreciable increases.  In addition, rather than increase, prices have a greater chance of declining because of the rising number of global virus cases being fought with new restrictions.  Any other significant price changes would need to be driven by an unexpected political, economic, or environmental event.  

During August, oil prices continued trading in a very narrow range but did achieve a small gain, starting the month at $41 and closing near $43 per barrel.  The following graph shows the daily price movements over the past three months:

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Significant uncertainty about the economy due to the virus’ impact has persisted for several months which has limited movement in prices.  In addition to oil’s stagnancy, overall average wholesale and retail prices for August were flat compared to July.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

Since retail and wholesale prices remained steady compared to the prior month, retail margins also barely changed.  The following graph shows the retail margins over the trailing 15 months: 

The outlook for oil prices over the next few months continues to be highly dependent on the course of COVID-19.  Sokolis Group believes oil prices will continue to trade in the low- to mid-$40’s per barrel through early September.  As fall begins, ongoing concerns about a resurgence of the virus will likely remain with the potential to increase restrictions.  However, any additional progress toward controlling the virus could result in increasing economic activity and demand for fuel.  If so, prices would likely rise toward $50 and beyond through the end of the year. 

During July, oil prices traded in an extremely narrow range, primarily between $40 and $42 per barrel throughout the month.  The following graph shows the daily price movements over the past three months:

Although prices increased in rapidly May when COVID-19 restrictions started to ease, they lost momentum in June, then stagnated in July as concerns grew about a resurgence of the virus.  Significant uncertainty regarding an economic recovery from the virus’ impact cast doubt on the demand for oil and fuel, leaving prices in a holding pattern.

While COVID-19 has been the overriding factor impacting prices, political tensions also came back into the picture with offsetting impacts.  The relationship between the US and China deteriorated further in July raising the possibility of another trade war flare-up that could negatively impact global economic activity and demand for oil.  In addition, Iran conducted military exercises in the Strait of Hormuz targeting a mocked-up US Carrier raising concerns of an escalation that could disrupt Middle East oil supplies.

Despite the very limited movement in daily prices during July, the overall average for July increased compared to June primarily because prices increased modestly throughout June.  Average monthly wholesale prices for diesel and gas also increased.  Retail prices for diesel continued to be relatively flat while retail prices for gas showed a small gain.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

As the graphs above show, retail prices for diesel were relatively flat compared to the prior month as retailers continued to absorb the wholesale price increase.  The result was that margins for diesel decreased again but remained above their typical level.  For gas, margins increased slightly while remaining on the upper end of their typical range.  The following graph shows the retail margins over the trailing 15 months: 

The outlook for oil prices over the next few months remains very uncertain and will be highly dependent on the course of COVID-19.  The political factors mentioned above are less likely to have any significant impact on prices compared to the virus, but they should not be ignored as history has shown they can significantly and rapidly impact prices. 

Sokolis Group believes oil prices will continue to trade in the low- to mid-$40’s per barrel through early fall with the potential to fall back into the $30’s if restrictions must be expanded to combat the spread of the virus.  However, there have also been reports of vaccine trials reaching advanced stages with the potential for approved use before the end of the year.  If positive vaccine results are announced soon, oil and fuel prices will likely begin rising toward $50 in anticipation of more robust economic activity and demand for oil. 

Oil prices traded in a narrow range throughout June following the significant rebound that began in May.  Although prices broke through $40 per barrel very briefly, they were mainly in the high-$30’s for the entire month.  The following graph shows the daily price movements over the past three months:

When COVID-19 restrictions started easing during May, businesses reopened and travel began to increase resulting in growing demand for oil and fuel.  In addition, OPEC+ extended their production limits to help offset the global oil supply glut that had built up over the past few months.  As demand increased with limits on production, oil and fuel prices began rising steadily throughout May.

As June began, concerns grew about a resurgence of the virus with the number of cases still rising in some countries.  In the US, a significant increase in cases was seen in many states that had loosened their restrictions earlier in May.  The uncertainty surrounding continued economic growth along with future demand caused oil prices to flatten in the high $30’s throughout most of June.

The overall average monthly oil prices for June compared to May showed a significant increase.  Wholesale prices for diesel and gas followed oil closely.  However, retail prices for diesel were relatively flat as demand lagged, primarily related to commercial trucking.  Meanwhile, retail prices for gas rose with wholesale prices as demand from individual consumers continued increasing.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

As the graphs above show, retail prices for diesel were flat compared to the prior month as retailers absorbed wholesale price increases and sacrificed some of their margins which have been running at very high levels.  For gas, margins had already declined significantly last month, and retailers were forced to increase their prices to keep pace with wholesale so their margins could be sustained.  The following graph shows the retail margins over the trailing 15 months: 

Looking out over the next few months, Sokolis Group believes oil prices will continue to hover near $40 per barrel with some variability based on COVID-19 developments.  The potential exists for prices to continue climbing toward the mid-$40’s and beyond if restrictions in many states continue to be eased and demand increases further.  However, as we have recently seen, significant new virus cases have emerged resulting in some restrictions being reinstated.  If the situation worsens, it could cause demand to stall and prices may fall back toward the mid- to lower-$30’s. 

Following the historic collapse near the end of April, oil prices began rebounding throughout May.  May’s prices started slightly under $19/barrel and nearly doubled by the end of the month closing over $35/barrel.  The following graph shows the daily price movements over the past three months:

The historic negative price dive in April was caused by a lack of liquidity in the futures markets when traders fled their positions as rising inventory levels threatened to exceed storage capacity.  During May, those storage concerns subsided as some countries, along with many states in the US, began to loosen their COVID-19 restrictions.  As businesses reopened and travel began to increase, global demand for oil and fuel began to grow.  With increasing demand and inventory levels receding, prices began rising.

The recent production cuts by Saudi Arabia, Russia, and other OPEC+ countries were another factor contributing to rising prices in May.  US oil producers also scaled back their operations.  These cumulative production cuts combined with the increase in demand provided solid support for oil prices in May.

Although oil prices rebounded sharply when looking at the overall overage for May versus April, diesel wholesale prices were surprisingly flat while gas increased significantly.  The growth in demand for gas was much more significant than diesel as individuals began to venture out of their homes again.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

As the graphs above show, retail prices for diesel showed a slight decline in May while gas retail prices were flat.  Despite the underlying increases in oil and wholesale costs, retailers absorbed those increases by sacrificing extraordinarily high margins they had been generating over the past couple months. Even though margins declined, they remained at a very high level for diesel.  Gas margins declined significantly to a level modestly above their typical range.  The following graph shows the retail margins over the trailing 15 months: 

As the summer months unfold and COVID-19 restrictions continue to be eased, Sokolis Group believes oil prices will remain in the $30’s per barrel with some potential to break into the $40’s if demand continues to rebound quickly.  However, the possibility also exists that oil producers could begin to increase production as prices rise which may partially offset any increases.  In addition, if a significant resurgence of the virus emerges and restrictions are tightened, the potential still exists for oil prices to fall back into the $20’s or lower.

As part of the sharp decline that began in January, oil prices set another somber record in April when they crashed below zero for a short period during the month.  Prices started the month at $20/barrel and managed to claw their way back to $19 by the end of the month despite the historic dip in negative territory.  April’s ending price is 70% below the start of this year along with the same time last year.  The following graph shows the daily price movements over the past three months:

COVID-19 continues to be the primary force driving prices down.  Global travel restrictions and lockdowns have significantly reduced economic activity and the demand for oil.  The decrease in demand across the globe has been estimated at roughly 30 million barrels per day, almost a third of pre-virus daily consumption. 

Looking closer at the historic negative dive in April, this event was caused by a lack of liquidity in the futures markets.  Oil is traded in option contracts that expire each month.  During the third week of April, options for the month of May were approaching their expiration date.  If option holders held their contracts to the end, they would have been obligated to take delivery of the oil.  The problem was that oil storage had become very limited as inventories grew from weak demand.  Traders were faced with the dilemma of taking delivery of oil with no place to store it.  They decided to pay someone else to take the option off their hands to solve the storage problem causing the option price to go negative.

Another notable item for April was that Saudi Arabia, Russia, and other OPEC+ countries agreed to scale back their oil production in an effort toward balancing the market.  Their cuts only amounted to about 10 million barrels per day which was far short of the decline in demand.  Oil prices barely responded to their action.  Production in the US also declined as a result of market forces.  With prices so low, many domestic wells became unprofitable to continue operating.  

Due to the continued decline in April, along with the sharp negative spike, the overall average price for oil was almost half of March’s average.  Substantial declines also continued for diesel and gas.  The graphs below show the movement of crude oil (converted to gallons) along with wholesale and retail fuel prices over the trailing 15 months:

While refined fuels declined, they did not get anywhere close to sub-zero like oil and should not be expected to do so in the future.  Refiners have cut back their utilization rates to a level around 70% compared to a more typical 90% as they adjust their throughput for lower fuel demand.  Even at the diminished output, they will still sell fuel at positive prices and generate crack spread margins, with diesel providing higher returns compared to gas.  Because they are refining less fuel, they are drawing less oil which is why storage has become very limited causing the negative option trades described earlier.

The retail price decline in April continued at a slower pace than wholesale.  Retail margins, already at unprecedented levels, rose even further in April.  As noted in the past, it is common for margins to increase during periods of rapid wholesale price declines when retailers take advantage of the opportunity to maximize their margins.  However, under these circumstances, it is important to recognize that retailers are pumping far fewer gallons and need higher margins to cover their overhead.  The following graph shows the retail margins over the trailing 15 months: 

Due to the market changes in April, almost all fleets should have seen a significant drop in fuel prices compared to March.  Fleets with diesel deals tied to wholesale cost indexes would have seen a larger decline at a faster rate compared to fleets purchasing at retail.

Looking out over the next couple months, parts of the world have begun easing their COVID-19 restrictions including many states in the US.  Sokolis Group believes that oil prices will remain at their relatively low levels through the summer until demand increases significantly.  If inventory storage remains tight while demand is low, the possibility exists for oil prices to drop quickly in late May when the next set of option contracts expire.  This would then be followed by a rebound like what happened in April.  For diesel and gas prices, as economic activity begins to strengthen, demand for fuel should grow.  Prices should stabilize and then start moving upward.