Oil prices drop, gas prices follow

The price of oil has been falling steadily for more than a week, dipping below $102 US a barrel Thursday in New York as worries over world oil supply diminish.

And gas prices are expected to fall also throughout most of Canada, according to gas price forecast website Tomorrowsgaspricetoday.

Theres not a direct correlation between gasoline prices and world oil prices, which headed above $107 for U.S. crude for August delivery in June because of tensions in Iraq.

• Gas price jump 'doesn't make sense'

• MAP: Gas prices across Canada

Instead, the supply and demand situation closer to home tends to have a bigger effect on the price of gasoline.

Although there is still fighting in Iraq and a group of Islamic militants control refineries in the north of the country, threatening supply from one of world's biggest producers, analysts believe there is adequate supply becauseLibya has begun exporting after more than a year of downtime.

Rebels who had blockaded two oil ports in the east of Libya have been driven back and the ports are now under government control. A major field restarted production Tuesday and analysts said crude shipments could ramp up quickly because oil has accumulated in tanks at the closed ports.

Lots of U.S. oil

But the biggest factor easing worries over global oil supply is the increasing production of U.S. crude coupled with very moderate demand south of the border.

Bank of America estimates that the U.S. has overtaken Russia and Saudi Arabia to become the worlds largest producer of oil and gas, primarily because of oil from shale.

A report Wednesday from the U.S. Energy Information Administration showed crude oil supplies were much larger than expected given that summer is peak driving season in the U.S.

U.S. total crude oil production, which averaged 7.4 million barrels per day in 2013, is expected to average 8.5 million bbl/d in 2014 and 9.3 million bbl/d in 2015. As a result, the need for imported oil will fall from 60 per cent of total U.S. oil use in 2005 to 22 per cent in 2015.

At the same time, U.S. consumers were paying about 3.68 US a gallon for gasoline in June, eight cents more than a year ago and they cut back on their fuel consumption. The EIA expects prices for gasoline from U.S. refiners to slip a few cents this year.

The abundant supply helps keep Canadian gas prices down, particularly in eastern Canada, where refined gasoline is imported from the U.S.

Gas is about $1.26 a litre in Orillia, Ont., $1.46 a litre in Vancouver and $1.44 a litre in Montreal on Thursday.

But Tomorrowsgaspricetoday analyst Dan McTeague points to some risks to Canada on gasoline supply going forward.

Less Canadian refining

A wave of mergers has led to dismantling of key petroleum product infrastructure in Quebec, Ontario and British Columbia, he said, so Canadians need to import higher value-added refined product at a premium.

Ottawa, meanwhile, is prioritizing efforts at getting crude to markets over the value of maintaining and enhancing the infrastructure of finished, value added refined supply, he said in his note on supply.

The heavy oil out of Alberta, called Western Canada Select, closed at $79.83US today, compared to $102.93 for West Texas Intermediate oil and $108.16 for Brent crude, the benchmark for international oil.

Canadian oil sells to the U.S. at a discount, while Canada is reliant on the U.S. for refining capacity, McTeague said.

The longer term risk is that U.S. refiners will adapt their plants to refine the ultra-light crude that comes from shale formations. That could put the market for some Canadian oil at risk.

However, the door to oil exports from the U.S. appears to be opening at the same time, with two companies allowed to export a limited amount of the ultra-light crude.

The U.S. administration says its stand against oil exports hasnt changed, but may be looking for a way to change the law that prohibits them, which dates back to the 1970s, without a protracted political struggle.