Oil inventory decline may raise gas prices

Nationwide oil inventories dropped last week for the first time in four months, causing oil prices to increase to a 2015 high Wednesday and raising the possibility that the supply glut — which has led to cheap gasoline and thousands of energy company layoffs — might be ending.

“I do think it’s a sign we’ve turned the corner,” said Phil Flynn, senior energy analyst for the Price Futures Group.

The Energy Department released data Wednesday showing that America’s crude oil inventories dropped by 3.9 million barrels last week from the previous week as drillers start cutting production in the face of the glut. The amount of oil at Cushing, Okla., the nation’s largest storage hub, has fallen for two straight weeks.

There’s sharp debate over whether American oil production will keep dropping and lead to a lasting rebound in prices.

The price of West Texas Intermediate oil, which sets the U.S. benchmark, has risen nearly 40 percent since late March to $61.32 a barrel Wednesday, a significant turnaround but still far below last summer’s price of $107.52.

The price has a huge impact on the economy. The increase helped drive the cost of gasoline up 23 cents per gallon in the past three weeks, according to AAA. But low oil prices are bad for states that depend on oil taxes for revenue, and they pose a threat to the U.S. shale-drilling boom.

Oil field service companies have laid off thousands of employees since the price crashed, and half as many drilling rigs are operating now compared with the end of last year.

U.S. oil production is now starting to drop — although slightly — after continuing to rise for months despite the price crash.

Flynn thinks oil prices might rise to $80 a barrel by the end of the year as the demand for oil appears better than expected in China and Europe.

“We’ve cut over 55 percent of U.S. drilling rigs, U.S. oil production looks like it’s peaking instead of expanding, and you have better-than-expected demand. It’s the perfect recipe for a bull market, and I think that’s what we have,” Flynn said.

Consultant and energy economist Philip Verleger disagreed, saying the price rebound won’t last.

“The higher prices are going to lead to people fracking a lot of the wells that have not been fracked, and so production will go back up — and prices will probably come back down,” Verleger said.

Drillers are getting more efficient at fracking — in which water, sand and chemicals are pumped underground to break shale rock and release the oil and natural gas trapped inside — and lowering the cost of doing it.

“What that’s going to mean is sooner or later we’ll have lower-price oil,” Verleger said.

Verleger said Saudi Arabia would also keep prices from rising too much. Saudi Arabia is refusing to cut oil production, betting it can outlast U.S. drillers at low prices and preserve its market share.

The Saudi-dominated Organization of the Petroleum Exporting Countries is expected to maintain production levels when it meets in Vienna next month.

This story was originally published May 6, 2015 at 7:08 PM with the headline "Oil inventory decline may raise gas prices."