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Market News US gasoline may continue to rise in summer, business and consumption are hurt

US gasoline may continue to rise in summer, business and consumption are hurt

Consumers are grappling with record-high oil prices, but soaring prices have also hurt businesses. The national average price for a gallon of gasoline hit a new high on Thursday, and the average price in California is now over $6. Russia's invasion of Ukraine has thrown already strained energy markets into turmoil. Higher gasoline demand is expected to lead to further increases in gasoline prices in the summer. Curbing demand may be the only solution to the problem, experts say.

2022-05-20
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The surge in U.S. gasoline prices is largely due to the surge in oil prices .

Russia’s invasion of Ukraine is the latest catalyst to push up crude prices , which were already rising before the war, and even before the pandemic, as energy producers slashed investment and profit margins under pressure from low prices and institutional shareholders demanding higher returns. low item .

Then, amid the ravages of the pandemic, demand for petroleum products fell sharply, and producers cut production further . People are not going anywhere, businesses are closed, and the need for fuel is greatly reduced. The sudden drop in demand sent the U.S. benchmark, West Texas Intermediate, briefly into negative territory.



The economy has since reopened, manufacturing has recovered, and people have started driving and flying again, leading to a surge in demand . The oil market has been increasingly tight since last fall. In November, U.S. President Joe Biden coordinated with other countries including India and Japan to tap the Strategic Petroleum Reserve (SPR) to stabilize oil prices, but the slowdown was short-lived.

Russia's invasion of Ukraine in late February threw already fragile energy markets into turmoil .

On March 7, U.S. oil prices surged to their highest level since 2008, exceeding $130 a barrel. Russia is the world's largest exporter of oil and products, and the EU depends on Russia for natural gas. While the U.S., Canada and other countries banned oil imports from Russia shortly after Russia invaded Ukraine , the EU said doing so would have adverse consequences.

Now, the EU is trying to craft a sixth round of sanctions against Russia, which includes oil , although Hungary is one of the countries opposed.

Oil prices have since retreated from post-invasion highs, but remain firmly above $100. Putting that number together shows that crude oil was at $75 a barrel in early 2022, compared with nearly $63 a barrel this time last year.

Oil prices, and the resulting rapid rise in fuel costs, are causing headaches for a Biden administration, which has called on producers to increase output. Oil companies are reluctant to drill after promising shareholders capital constraints, and executives say even if they wanted to increase production, they couldn't . They are facing the same problems as the entire economy, including labor shortages and rising prices for parts and raw materials , such as sand, which is crucial to fracking production.

Oil makes up more than half of the final cost per gallon of gasoline, but it's not the only factor. Taxes, distribution and refining costs also affect prices .

Restricted refining capacity is starting to play a bigger role. Refining is a critical step in converting crude oil into petroleum products that consumers and businesses use every day. The amount of oil refiners can process has fallen since the pandemic, especially in the northeastern United States.

Meanwhile, Russia's exports of petroleum products are being hit by sanctions, forcing Europe to find alternative suppliers. Refiners are operating at almost full capacity, and diesel cracks (the difference between a refiner's cost of oil and the selling price of a product) are now at record levels.

All of this is pushing up gasoline prices. The average U.S. gasoline price hit a record high of $4.589 a gallon on Thursday, up from $3.043 a year earlier, according to AAA. The figures are not adjusted for inflation. Each state is now averaging over $4 a gallon for the first time on record, and California’s statewide average is now over $6. Diesel prices are also surging, with retail diesel hitting an all-time high of $5.577 a gallon on Wednesday, up 76% from last year. U.S. households now spend $5,000 a year on gasoline, up from $2,800 a year ago, according to Yardeni Research.

Looking ahead, experts say curbing demand may be the only thing that will keep gasoline prices in check .

John Kilduff, a partner at Again Capital, said the national average gas price is likely to hit $5 during the busy driving season between Memorial Day weekend and July 4. " It looks like the national average needs to improve , and last week we saw gasoline demand soar to typical summer levels ... there's more upside here ," he said on Wednesday.

He pointed to two key factors spurring demand despite high prices, pent-up demand post-pandemic, and a strong labor market , meaning people will pay what they have to pay to get a job.

Andy Lipow, president of Lipow Oil Associates, said he sees national average gasoline prices peaking between $4.60 and $4.65 . He noted that the stock market sell-off dragged gasoline futures lower, which could temporarily ease consumer demand for gasoline. But oil is also used in many consumer goods, especially plastics, meaning even if gasoline prices cool temporarily, costs across the economy could continue to rise if prices remain high.

Rapidan's McNally said that at the moment only a recession will curb product inflation . "It's not a bullish forecast. But petrol prices will only rise further as there is no sign of a real pullback in demand... it will keep going higher until that happens."



Brent Crude Oil Daily Chart
GMT+8 at 12:48 on May 20, Brent crude oil was continuously at $111.41/barrel
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