Gasoline prices may have peaked over the summer and are now heading toward $4 a gallon, but all bets are off if there’s a hurricane or other disruption that drives oil prices much higher or disrupts fuel supplies.
The national average for unleaded gasoline was $4.467 a gallon on Wednesday; Prices have steadily declined from a nationwide high of $5.01 on June 14, according to AAA. Weekly fuel demand data from the Energy Information Administration (EIA) suggest drivers have cut gas mileage and tight supplies are improving.
“I spoke to three major retailers. … They all said about demand over the last three weeks, we’re down 5% or 6% over the same weeks last year,” said Tom Kloza, head of global energy research at OPIS.
“The most common price in the country starts with a ‘3,’ $3.99,” he said. That’s the price some big chains are charging in areas with lower gas prices, and analysts say gas below $4 has psychological appeal.
Prices vary widely across the US, with drivers in Georgia paying a relatively low $3.98 a gallon, for example, while Californians pay $5.84 for unleaded gasoline, according to the AAA.
The high prices have clearly impacted demand from motorists, but there could be other factors at work, analysts say.
“I think it’s a combination of Covid and continuing to work from home,” Kloza said. Recession concerns have also kept oil prices under control. However, Kloza warns that gas prices could climb back to $5 later this year due to a number of factors.
For one, Europe is expected to be off Russian oil by the end of the year, and analysts fear this could put upward pressure on crude and fuel prices.
“If there are no incidents, problems with refineries in terms of breakdowns or hurricanes, then yes,” Kloza said gasoline prices would go down. “Crude inventories are about 152 million barrels down on last year. You might see crude oil prices go up, or you might not.
Not since the 1970s have consumers faced rising energy prices while the prices of other goods and services have risen sharply. Energy inflation accounted for almost half of the 9.1% rise in CPI in June.
“With these higher prices across the board, people are being hit left, right and center. Discretionary driving has only been filed for now,” said John Kilduff, partner at Again Capital.
Oil prices are a major contributor to gasoline prices, and crude has been rising again of late after West Texas Intermediate crude fell to a low $90 a barrel this month. WTI futures were at $103.45 a barrel on Wednesday afternoon, down about 0.7% from the weekly report of weaker gasoline demand.
Gasoline demand was 8.5 million barrels per day last week, up from 8.1 million barrels the week before, according to the EIA. Meanwhile, the four-week moving average was 8.7 million barrels per day, up from 9.3 million barrels a year earlier. Kilduff said pre-Covid demand would have been 9.5 million barrels a day or more at this time of year.
Analysts initially questioned the report, which showed such low demand during the Independence Day week, attributing it to potential data-gathering difficulties during the holiday season.
“He falls two weeks in a row. It’s starting to look like a reliable trend,” Kilduff said.
Patrick DeHaan, head of petroleum analysis at Gas Buddy, notes that gasoline stocks have also recovered. According to the EIA, gasoline inventories grew by 3.5 million barrels last week to a total of 228.4 million barrels.
“We’re still a little tighter on supplies than I want to go into hurricane season, but we’ve seen gasoline stocks building up four of the last five weeks now,” DeHaan said. He said this is likely to push down RBOB gasoline futures, which represent the expected price of gasoline in New York Harbor.
RBOB futures were down 0.7% on Wednesday afternoon, trading at around $3.28 a gallon.
“I still think there’s a possibility that we get to $3.99 nationally [by mid-August]DeHaan said. “It can certainly be derailed by unexpected shutdowns, better-than-expected economic data, and hurricanes.”
DeHaan said the concern is that a strong hurricane will hit Gulf Coast production and the refining centers of Texas and Louisiana. Refineries are running at high capacity, although utilization has fallen 1.2 percentage points to 93.7% over the past week.
DeHaan said the lower demand could be some kind of anomaly, and he speculated it could be caused by gas stations holding back orders and waiting for even lower prices.
“I think Labor Day might end up being the cheapest summer vacation at the pump,” DeHaan said. “We can have expectations of what emerges from economic data, but we have no expectations of what emerges in the Atlantic or the tropics. The joker this year is hurricane season. … If we get a Harvey or an Ida shutting down when we shut down oil and gas production, we could be right back to record levels. We are not clear.”
In late May, JPMorgan forecast that gasoline could hit as high as $6.20 a gallon by the end of the summer.