By Tom Ozimek
Even though gasoline prices have slid below $4.50 per gallon on average nationwide in what’s been a multi-week downward trend, an industry expert warns that the reprieve is likely temporary and drivers should brace for pump pain as oil readies to rally in a “second act.”
The national average gasoline price on July 20 fell to $4.47 per gallon, according to the AAA, as lower global oil prices combined with a drop in U.S. domestic gasoline demand.
“Global economic headwinds are pushing oil prices lower and less expensive oil leads to lower pump prices,” Andrew Gross, AAA spokesperson, said in a statement. “And here at home, people are fueling up less, despite this being the height of the traditional summer driving season. These two key factors are behind the recent drop in pump prices.”
If these supply-demand dynamics hold, AAA predicts further price relief at the pump.
But one industry expert says drivers should brace for gas prices to reverse their falling trend as oil prices stage a possible rebound.
‘A Tragicomedy in the Making’
Tom Kloza, founder of the Oil Price Information Service (OPIS), said in a statement that, even though retail gasoline prices slipped below the $4.50 per gallon mark, he expects that “this respite may be a prelude to oil’s second act—a tragicomedy in the making.”
To support his hypothesis, Kloza noted that wholesale gasoline prices have jumped by around 10 cents per gallon in the past week or so.
Wholesale gasoline futures touched a 3-month low of around $3.19 per gallon on July 14 and, by July 19, had climbed steadily to $3.28, according to Tradingview data.
Kloza earlier warned in a post on Twitter that wholesale markets for gasoline and diesel, as well as crude oil, were searching for a “launching pad” to take off from in the second half of 2022.
Crude oil prices started the week in rally mode, with West Texas Intermediate jumping over 5 percent from around $99 a barrel on July 18 to around $104 on July 19, before giving back those gains and back trading intraday on July 20 at around $99.
The international benchmark Brent crude followed a similar trajectory at the beginning of the week, except that it has stayed elevated on July 20 at around $106 a barrel from around $103 three days ago.
Kloza said in an OPIS webinar on July 12 that he expects considerable price volatility in gasoline and diesel going forward.
“This is a bit of an interlude in what is going to be a stormy, stormy path the rest of this year and into 2023 as well,” he said.
Low stockpiles of diesel, in particular, mean more price uncertainty going forward, according to Kloza.
“Watch diesel prices in the next six months. They could go absolutely parabolic in a replay of what we saw in March and April,” Kloza said.
Diesel plays a major role in powering the global economy as it’s used to transport nearly everything that is grown, processed, or manufactured.
The latest report on U.S. inflation (pdf) showed that the category of motor fuels that includes diesel soared 75.8 percent year-over-year, higher than the 59.9 percent jump in gasoline prices.
Jared Bernstein, a member of the White House Council of Economic Advisers, told CNN in a recent interview that he expects gasoline prices to continue falling through July but cautioned that, beyond that, the picture is fuzzy.
“Nobody can see reliably around the corner when it comes to those prices falling a couple of quarters away,” Bernstein told CNN’s “State of the Union” program that aired on July 17.
‘Stratospheric’ Crude of $380 a Barrel?
Concerns that gasoline and diesel prices could soar again are tied to efforts to further tighten the sanctions screws on Russia over its invasion of Ukraine.
The United States and its G7 allies have proposed a price cap on Russian oil to reduce funds flowing to Moscow.
But J.P. Morgan has warned that Russia could retaliate by restricting its oil output to create a shortage in the market to prop up prices.
The investment bank’s analysts predicted at the beginning of July that a 3 million-barrel cut to daily supply by Russia could push Brent up to $190 a barrel, according to Bloomberg.
A worst-case scenario of a 5 million-barrel cut could mean “stratospheric” crude prices of $380 a barrel, according to the analysts.
Gal Luft, co-director of the Institute for the Analysis of Global Security, told CNBC in a recent interview that the proposed price cap on Russian oil is a “ridiculous idea” that could backfire.
“Those Europeans and Americans that are talking about $40 a barrel, what they’re going to get is $140 a barrel,” Luft warned, while making the same argument as J.P. Morgan analysts that Russia could cut production as a retaliatory measure.