US Gas Prices Could Eye $4 in Summer as Oil Rally Persists
US Gas Prices Could Eye $4 in Summer as Oil Rally Persists

By Andrew Moran

The average cost of gasoline could rise to $4 a gallon this summer, reigniting inflationary pressures and weighing on motorists’ wallets.

According to the American Automobile Association (AAA), the national average for a gallon of gasoline has surged about 15 percent year-to-date to $3.53.

“Watch out for summer gasoline prices, which some predict may extend above $4 per gallon nationwide and put pressure on inflation,” said Rob Thummel, a senior portfolio manager at Tortoise.

Despite gas prices drifting back and forth by a penny for the past week, industry experts warn that the upward movement could reaccelerate.

“Gas prices are a lot like seasonal temperatures. They start to rise with the arrival of spring,” said Andrew Gross, a spokesperson for AAA. “Gas prices are settling into a pattern similar to last year when the usual seasonal increase was slow and steady.”

Patrick De Haan, head of petroleum analysis at GasBuddy, says motorists have enjoyed a bit of a break from the latest weekly price hikes. But the country is not out of the woods yet, Mr. De Haan warned.

“While we seem to be nearing a short-term peak, one word of caution for those in the Mid-Atlantic and Northeast: you haven’t yet finished the transition to summer gasoline, so you may experience some sticker shock in a few weeks,” he said. “Be prepared for somewhat of a punch. For the rest of the nation, so long as we don’t see extenuating circumstances, we’re likely close to a top in prices.”

Indeed, summer-grade fuel is costlier to manufacture as the production process is strenuous and longer and can add as much as 15 cents per gallon to the final cost of higher-grade fuels.

But while this helps explain part of the problem, the other factor is that the significant climb has been driven mainly by the rally in global oil markets.

West Texas Intermediate (WTI) crude prices topped $85 per barrel on the New York Mercantile Exchange for the first time since October 2023. Brent, the international benchmark for oil prices, is eyeing $90 a barrel on London’s ICE Futures exchange, a level unseen since in six months.

Crude oil accounts for more than half of the price of gas.

Oil has surged on several factors, including tight global energy markets, geopolitical tensions, and Federal Reserve policy expectations.

In Demand

As several major economies are expected to avert a sharp downturn, energy demand worldwide is anticipated to remain solid.

U.S. economic growth was better than expected in the fourth quarter, rising 3.4 percent. Moreover, the Federal Reserve Bank of Atlanta’s GDPNow Model estimate suggests 2.8 percent growth in the first quarter.

Domestic manufacturing also recorded its first monthly expansion since October 2022.

The challenge for the United States has been back-to-back hotter-than-expected inflation data in the three primary measurements: the consumer price index (CPI), the producer price index (PPI), and the personal consumption expenditure (PCE) price index. Rising energy prices could facilitate a second inflation wave, economists say.

As a result, the Federal Reserve might delay its first cut to interest rates. A chorus of monetary policymakers have insisted that they can afford to be patient because of a resilient economic landscape. However, the futures market is still penciling in three rate cuts beginning at the June Federal Open Market Committee (FOMC) policy meeting, according to the CME Fed Watch Tool.

“The timing and magnitude of the eventual rate cuts are clearly impacting sector rotations by investors as they try to perceive what the Fed will do and how that will impact the consumer,” said Mr. Thummel.

Meanwhile, other countries have recently reported better-than-expected data. Canada narrowly avoided a recession and posted solid monthly GDP readings. Optimism in Japan’s services sector soared to a 33-year high amid strong tourism levels and ballooning profits. European oil demand was more significant than projected.

State of Supply

The latest economic developments could exacerbate tightness, particularly as the Organization of the Petroleum Exporting Countries (OPEC) and its allies, OPEC+, recently extended their voluntary output reductions of 2.2 million barrels per day into the second quarter.

A 3D-printed oil pump jack is seen in front of the OPEC logo in this illustration picture on April 14, 2020. (Dado Ruvic/Reuters)

Additionally, Reuters noted that Russian Deputy Prime Minister Alexander Novak confirmed that Moscow’s oil firms will concentrate on cutting output instead of exports in the April to June period. His remarks come as Ukraine’s drone attacks have damaged several major Russian refineries, removing approximately 1 million barrels per day of Russian crude processing capacity from the market.

As for production, U.S. Energy Information Administration (EIA) statistics for the week ending March 22 show that domestic crude output has stalled at 13.1 million barrels a day. At the same time, gasoline demand is down about 4 percent from the same time a year ago to 8.71 million barrels, and inventories are up roughly 3 percent year-over-year.

National drilling activity has also hit a roadblock. The Baker Hughes Oil Rig Count, which measures the number of active drilling rigs, has hovered around 500 since September 2023.

Phil Flynn, an energy strategist at The PRICE Futures Group, warns that robust growth and consumption trends could fuel global supply deficits.

“With the global well supply deficit already developing, the increased risk to supplies will keep the market on edge,” wrote Mr. Flynn in an analyst note. “Oil products like gasoline and diesel are starting to bounce back after being skeptical about the move, but the inventories for products around the globe are below average, and that should keep the market well supported on breaks.”

According to Mr. Thummel, global crude inventories are at 16-month lows, and demand in the first quarter is anticipated to be higher than expected. Worldwide oil demand is projected to reach an all-time high this year.

Geopolitical strife has also contributed to oil’s rally this year. From Middle East tensions to the Houthis’ bombardment of attacks in the Red Sea, investors have been paying close attention to the region as the developments could result in delivery delays and higher shipping rates. So far, traders are waiting for further news as to whether it could spread into a wider and more intense regional conflict.

Last month, JPMorgan Chase strategists said they think that Brent crude prices could touch $100 a barrel by September. Should this prediction come to fruition, $4 gas might not be out of the realm of possibility this summer.

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