Current gasoline prices shown on March 29, 2022 in Garden Grove, CA.
Mike Black | Reuters
Gasoline prices have been a wildcard in consumer wallets this summer, as tight supplies and uncertainty in Ukraine could push up fuel costs.
Gasoline prices are climbing to $5, and they look set to remain high even after the peak driving season in July. The Yardeni Research project has shown that households are spending Equivalent to $5,000 per year Gas costs, compared to $2,800 a year ago.
During a normal summer, gasoline prices rise in May and then peak mid-month. The summer driving season kicks off on Memorial Day weekend at the end of the month, with the most drivers on the road in July — just after the July 4 holiday.
With inflation over 8%, drivers are unlikely to take a break this year. After falling in April, gasoline prices have been rising to record levels this month as oil prices climbed. Gasoline experts expect prices to rise to $5 a gallon or more, with JPMorgan analysts even forecasting a national average of $6.20 a gallon in August.
The national average for unleaded gasoline hit a new high of $4.56 a gallon on Wednesday, According to the American Automobile Association. That’s 4 cents above Tuesday’s price and up 16 cents a gallon in the past week alone. This time last year, the price was $3.04 a gallon.
“The goalposts keep moving. I think we’re probably around a third of the $5 national average,” said Patrick DeHaan, director of petroleum analysis at GasBuddy. “We’re definitely going a little higher in the short term, but We’re still waiting to see if the EU sanctioned Russian oil. They talked about it. That could drive momentum towards $5.”
For the first time this week, the average price of unleaded gasoline in all 50 states was $4 a gallon or more, AAA data showed. Prices vary widely due to taxes and other factors—the average is $6.05 per gallon in California and $4.50 per gallon in Florida.
Tom Kloza, head of global energy research at OPIS, said he expects the national average price for peak driving to rise above $5. He also expects states and the federal government may lower gasoline taxes to soften the blow to consumers.
“I think gasoline is special. A Biden administration is busy trying to mitigate higher numbers,” Kloza said. “I do think we can see $5, and I don’t think we’re going to go beyond that. When you go over those numbers, you do destroy demand.”
Cloza said he expects that if gas prices are too high, consumers will drive less, which will lower prices somewhat. A slowing economy could also slow price gains, analysts said.
In futures markets on Wednesday, the RBOB gasoline contract fell 5.5% to $3.72 a gallon after Target’s quarterly results sparked concerns about consumer health. This follows Walmart’s earnings miss on Tuesday.
“It’s a reminder of how much air there is at this price,” said John Kilduff, partner at Again Capital. “There are concerns about the economy and there are concerns about demand. These gains from Target provide information about how squeezed consumers are. While our demand is strong, there is concern that we are not going to stay high.”
Target CEO Brian Cornell blames gas prices as one of the factors affecting consumers. At his store, customers are putting off buying items like TVs and appliances, and spending more on travel luggage. But they also spend more on food, beverages and household items.
According to Yardeni Research, consumers’ inflation-adjusted income has barely increased. On the one hand, they accumulate a lot of savings; on the other hand, they charge more for their credit cards.
“It’s no wonder consumer confidence is so subdued. It’s strange that retail sales were so strong in April and May,” Yardney said in a note. April retail sales The annual growth rate was 8.2%.
natural gas price wildcard
Gasoline prices are most affected by oil prices, and the outlook for crude looks less certain.
Before the Ukrainian invasion, Russia exported 5 million barrels of oil a day to world markets, as well as more than 2.5 million barrels of refined products. U.S. and allied sanctions have limited Moscow’s ability to sell its crude, which has strained supplies of everything from diesel to jet fuel.
Now, the EU’s efforts to completely stop buying Russian oil are just a wild card for fuel prices, which are also strained by reduced refining capacity.
“You’re going to have two problems. Not enough refining capacity, and not enough refinery investment,” said Helima Croft, head of global commodity strategy at RBC. “Now you have this war problem. We don’t know how much Russian oil is going to become impossible. Get it. We know it’s not popular … we don’t know how widespread sanctions in Europe will be.”
Croft said it was unclear whether secondary sanctions would be imposed on countries such as India and China that continue to buy Russian crude. “We don’t know if Russia is going to play in an orderly way in Europe. We don’t know if they want to cut off Europe early,” she said.
Refining Risk
Last week, U.S. drivers used about 9 million barrels of gasoline a day. That was down from 9.2 million bpd a year ago, but up from 8.7 million bpd the previous week, according to the Energy Information Administration.
That’s because U.S. refining capacity has overall contracted by about a million barrels over the past few years. An explosion at the Philadelphia Energy Solutions refinery in 2019 took the refinery offline, causing only one facility to lose 335,000 barrels of oil per day.
Analysts said some refiners may switch gasoline production to diesel due to the scarcity and high price of truck fuel, but in limited quantities. Diesel is in such a short supply that the price per gallon has jumped to $5.57 a gallon, according to the AAA.
“The physical market is very tight this summer, and there may be some hot spots on the supply side against the backdrop of strong demand,” De Haan said. “It’s all about refining capacity. We don’t have enough capacity … pipelines, refineries – if any infrastructure fails this summer – there could be limited disruption.”
It would also change the outlook for a national average of about $5 a gallon to possibly higher prices.
“I think you can get into doomsday digital territory, but you might need a hurricane. I think when hotels charge $400, airfare goes from $200 to $700, and the fill fee is $100, trips start to get canceled You tank,” Kloza said.
