By Naveen Athrappully
Gas prices in the United States have hit their highest level in eight months amid rising global oil prices, with California registering the highest gas price at the pump.
The price of regular gas averaged $3.75 per gallon nationally on Saturday, according to data from AAA. This is the highest gas price in the United States in eight months. California saw the highest statewide price at $4.98 per gallon. In total, six states had gas prices in excess of $4. The lowest price was in Mississippi, where people paid $3.29 for a gallon of gas.
In a July 27 press release, AAA blamed oil prices as the primary cause of rising gas prices, pointing out that oil prices have risen by $4 over the past few days to hover around $80.
Since oil makes up roughly 50 percent of the cost of gas, higher oil prices will inevitably result in higher gas prices at the pump. “Gas demand, meaning people fueling up, remains tepid. It’s lower now than at this time last year and in 2021,” said AAA spokesperson Andrew Gross.
“But while the heat may be keeping some folks home, it also suppresses refinery production, according to experts. Constrained supplies and a higher cost of oil are tipping the balance toward rising pump prices for now.”
Gas demand saw a marginal increase last week, while domestic gasoline stocks saw a slight decline. As such, should there be a demand spike, AAA expects pump prices to rise, given the tight supplies.
Oil prices have risen for the fifth straight week, with investors hopeful that supply cuts and healthy demand will keep supporting prices. Earlier this month, the OPEC+ alliance announced a reduction in oil output.
There is also a market expectation that the rate hike policy by the U.S. and European central banks may be nearing an end, which would boost the economy and is positive for oil prices.
Rising Oil Prices
In an interview with Fox, Patrick DeHaan, head of petroleum analysis at GasBuddy, pointed to the Biden administration’s oil policy as playing a part in the recent rise in oil prices.
“Part of the reason why the market is suddenly swinging up the upside is the end of those Strategic Petroleum Reserve (SPR) releases that ended in early July,” he said. “Now, the market has swung into an imbalance that will probably grow over the months ahead and can push oil prices up even more significantly.”
Beginning in late 2021, the Biden administration sold oil from the SPR in a bid to rein in rising prices. As a consequence, the reserve had fallen to the lowest level since 1983 by early July this year. With the sale of SPR oil no longer happening, the oil market has thus lost another source of supply, which can add upward pressure on the price.
DeHaan also raised concerns about hurricanes affecting prices. The hurricane season in the Atlantic basin already started on June 1 and is expected to last until Nov. 30, with their peaks usually during mid-August to mid-October.
“The biggest question looming really when it comes to oil—is the U.S. going to see a major hurricane that could impact our own oil production in the month of August. That would put us at more risk of even higher oil prices in the months ahead,” he said.
OPEC’s oil cuts are another factor pushing up oil prices. OPEC+, which includes OPEC and allies led by Russia, has been reducing oil supplies since November to boost prices.
Saudi Arabia has said that it will extend its one million barrels per day of oil cuts into August. Russia announced a 500,000 barrel-per-day reduction for the month. Back in June, OPEC+ had agreed on a deal to restrict oil supply into 2024.
Oil Price Forecast
As to where oil prices could go, opinions are split among experts. In an interview with CNBC on July 24, Goldman’s head of oil research, Daan Struyven, said that the bank is expecting Brent crude to rise to $86 per barrel by year-end. Brent crude was trading around $84 per barrel as of 8:05 a.m. EDT on Saturday.
“We expect pretty sizable deficits in the second half with deficits of almost 2 million barrels per day in the third quarter as demand reaches an all-time high,” he said.
Pointing to the decline in rig counts. Mr. Struyven said that the bank expects “U.S. crude supply growth to slow down pretty significantly to a sequential pace of just 200 barrels per day from here.”
“Key point here for investors is, with the uncertainty about oil demand being so elevated, investors may require a premium to compensate for the elevated risk from such elevated demand uncertainty.”
In contrast, Per Lekander, the managing partner of investing group Clean Energy Transition, predicts that oil prices could become far cheaper than they are now.
In an interview with CNBC on Thursday, Lekander said that weak oil demand and a lack of cooperation could end up triggering a collapse of the OPEC+ alliance that accounts for around 40 percent of global crude oil output. The breakup could result in oil plunging to as low as $35 per barrel.
“In a growing market, time is your friend. You just need to wait a bit and things tighten up and improve … In a declining market, time is your enemy. You have to keep cutting, keep cutting, keep cutting,” he said.
“The more negative growth there is, and the less cooperation you have—and remember the last OPEC decision, it was really the Saudis doing it on their own … So, I would say, if my forecast is correct, and I’m very sure it is … it is going to break.”