Betting on Gasoline Prices? Good Luck!

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Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--The United States is approaching the last few weeks of the summer driving season and gasoline prices are edging lower, although there may be several factors that will keep a top reminder of inflation present in the minds of drivers.

Travel club AAA reports a national average retail price of $3.89 for a gallon of regular unleaded. That's a good 10% lower than the $4.38 per gallon from a month ago and more than 20% less than the all-time high of $5.01 set on June 14.

Energy prices account for the bulk of consumer inflation and are arguably one of the most abundant reminders of price trends so far in 2022. Prices for gasoline, natural gas and crude oil are all elevated relative to last year. The average price at the pump at this point in 2021 was $3.16 per gallon.

But there is some apparent relief. The latest U.S. federal data show inflation over the 12-month period ending in July was 8.5%, still incredibly high, but a slight drop from the prior month. Nearly all of that relief came from energy prices.

And the situation may get better from here on out if demand fades with the start of the school year, which effectively puts any major travel plans on hold. And by the middle of next month, refineries can start making the winter blend of gasoline. That's cheaper to make than the summer blend, which requires more processing to keep it from evaporating during the warmer months.

But this is not a normal year. The Western response to the Kremlin's aggression in Ukraine is to sideline fuels from Russia, one of the dominant energy suppliers in the world. That supply-side squeeze only added insult to injury given the pent-up demand that was already pushing prices higher by the start of this year.

Meanwhile, there are secondary factors such as labor shortages, which means more parents may have to take their kids to school because of the lack of bus drivers. Some schools may also be still on hybrid mode given the stubbornness of the COVID-19 pandemic. And air travel is something of a gamble, forcing some stranded travelers to hit the road to get to their final destinations. All of those are wild cards.

And don't forget that it's hurricane season in the Atlantic.

"Drivers are now benefiting from gas prices that are $1.11 less than their peak in mid-June," said Andrew Gross, AAA spokesperson, in a statement Monday. "But now we need to keep an eye on the weather as hurricane season arrives. These storms can affect prices by disrupting oil production in the Gulf of Mexico and impacting large coastal refineries."

And as if on cue, the U.S. National Hurricane Center shows a storm brewing in the Atlantic that could pose a threat to the Gulf of Mexico and the dense network of refineries. There's only a slight chance this system will turn into a major storm, but the U.S. Gulf Coast has been spared so far this year and it's only a matter of time before Mother Nature adds a premium to the retail price of gasoline.

And what about demand? It's okay, all things considered. The U.S. Energy Department showed the total volume of refined petroleum product supplied to the domestic economy, a proxy for demand, was 20.2 million barrels per day (BBL/d) for the week ending August 15. For the similar week in 2019, to discount the pandemic, total product supplied was 21.6 million BBL/d, about 6% higher than current levels. That, however, does not include data on fuel efficiency, which has improved enough by now to curb at least some demand for road fuels.

So where are prices headed? It's tough to say. Markets have been exceptionally volatile as of late. Crude oil prices, which account for the bulk of what consumers pay at the pump, saw losses as deep as $3 per barrel Monday on word of a breakthrough in Iranian nuclear talks, but jumped as high as $5 per barrel during the following session on rumors that OPEC wants oil priced in the triple digits.

The U.S. Department of Energy, in its latest monthly forecast, put the rest-of-the-year average at about where it is now--around $3.80 per gallon nationally. But the full extent of the push away from Russia fuels has yet to be seen, so prices could go higher from here.

And in terms of the economy, prices still hurt. With gasoline prices trending lower, consumers are starting to notice that everything else is more expensive too. Groceries, for example, are 13% more expensive than last year, and many households heating their homes with natural gas are in for a rude awakening when utilities adjust their rates to account for the record-high price for Henry Hub, the U.S. benchmark for the price of natural gas.

A better sense of the economic road ahead will be gained when economic policymakers descend on Wyoming later this week for the annual Jackson Hole summit. But the market remains under pressure from the war in Ukraine, and everyone is still seeing painful levels of inflation. So like predictions for the price of oil, it may be anyone's guess on what happens next for the price at the pump.

Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking over 200,000 current and future projects worth $17.8 Trillion (USD).