By Andrew Moran
Motorists are enduring more pain at the pump during the typically busy driving season as gasoline prices extend their gains amid a rally in the global oil market.
The national average cost for a gallon of gasoline approached $3.76 on July 31, up more than 6 percent from a month ago, according to the American Automobile Association (AAA). Year-to-date, gas prices have surged 17 percent. But they are still down 25 percent from the June 2022 peak of $5.02.
“Gas demand barely budged from last week, yet compared to this time in 2022, it is higher nationwide except for the Gulf Coast, Texas, and New Mexico,“ said Andrew Gross, AAA spokesperson, in a statement. “Some industry experts speculate that scorching temps in that region are keeping people off the road.”
Domestic gasoline demand has been on the rise for much of July, reaching nearly 9 million barrels for the week ending July 21, according to Energy Information Administration (EIA) data. This is up 5 percent from the same time a year ago.
Industry observers say that refinery issues have also contributed to the jump in gas prices.
Phillips 66’s refinery in New Jersey was offline for most of June and July. Marathon Petroleum’s Texas refinery has been offline since mid-May. Moreover, the high temperatures are amplifying refinery challenges in Louisiana and Texas as the equipment is outdoors and exposed to excessive heat this summer.
“Gas prices suddenly soared over the last week due to heat-related refinery outages that impacted some of the largest refineries in the country, at a time when summer gasoline demand peaks and as gasoline inventories slid to their lowest July level since 2015,” said Patrick De Haan, head of petroleum analysis at GasBuddy, in a note.
EIA figures highlight that gasoline supplies plunged by 4.4 million barrels in July.
The Oil Rally Surprise
Since crude oil accounts for about half of the cost of gasoline, the rally in international energy markets has been the driving force behind the upward trajectory in gas.
West Texas Intermediate (WTI) crude is trading at around $81.50 per barrel on the New York Mercantile Exchange, the highest level since April. U.S. crude is poised for the largest monthly gain in more than a year, soaring 16 percent. The WTI contract also turned positive on the year last week, climbing more than 1 percent year-to-date.
In the first half of 2023, crude prices had been trending downward, driven by recession fears, the banking turmoil, and a lackluster Chinese economic recovery. But traders are now “waking up and smelling the coffee” by pricing in the “reality” of a coming global supply deficit, says Phil Flynn, a senior market analyst at The PRICE Futures Group and contributor at Fox Business Network.
In his daily Energy Report, Mr. Flynn had routinely warned about a supply shortage in the worldwide energy market.
“This was like watching a slow-motion train wreck and trying to get people to pay attention. The market was so driven by fear that it wasn’t looking at reality,” Mr. Flynn told The Epoch Times, adding that traders are now concerned that the market could be undersupplied by 2 million barrels per day by the end of the year.
Supply woes and price gains are being exacerbated by expectations that Saudi Arabia will extend voluntary production cuts of 1 million barrels per day (bpd) heading into September and tighten international supply. Riyadh’s current cuts have hampered global inventories, particularly in places that have witnessed demand outpace supply.
The energy powerhouse has been enduring the lion’s share of the extra voluntary oil production cuts agreed by members of the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+. While the market consensus is that Riyadh will maintain cuts, there is some consternation as the economy slowed in the second quarter, growing at an annualized pace of 1.1 percent, down from the 3.8 percent growth rate in the previous quarter.
In the United States, domestic stockpiles have declined by about 20 million barrels since March, according to data from the EIA. In this span, drawdowns totaled nearly 49 million barrels, while builds have come in at nearly 30 million. Production has also flatlined in 2023, stalling in the range of 12.2 million and 12.4 million bpd. This remains under the pre-pandemic high of 13.1 million barrels, and output has been below-trend compared to the 12 months heading into the COVID-19 public health crisis.
In addition, the Biden administration continues to withdraw from the Strategic Petroleum Reserve (SPR). This year, crude supplies have dropped approximately 7 percent to below 347 million barrels.
The SPR drawdowns further distorted energy markets by releasing oil “that discouraged investment” because the supply release “was smoke and mirrors,” Mr. Flynn noted.
China, meanwhile, has also been a focal point in energy markets this year. Data emanating from the world’s second-largest economy show that the post-crisis recovery has been sluggish.
The National Bureau of Statistics Manufacturing Purchasing Managers’ Index (PMI) was stuck in contraction territory for the fourth consecutive month in July. The services sector slowed for the fourth straight month. The second-quarter GDP growth rate came in at 6.3 percent, falling short of the consensus estimate of 7.3 percent.
But analysts say that investors have been ebullient over crude demand. In June, oil imports reached 12.67 million bpd, up more than 45 percent year-over-year. At the same time, energy markets were excited over China’s Politburo meeting that decided to stimulate consumption after calling the post-pandemic recovery “tortuous.”
“China is key for global oil demand growth this year and the market has been getting increasingly concerned over the weaker-than-expected economic recovery, so any support measures will be helpful in easing some of these concerns,” wrote Warren Patterson, the head of commodities strategy at ING, in a July 25 research note.
What a difference a month can make. After settling below $68 a barrel on June 27, oil prices have added roughly $13 to the WTI price.
A chorus of market observers do not think the rally has finished.
Rob Thummel, the senior portfolio manager and managing director at Tortoise, believes crude prices could climb to the $90-a-barrel range.
“Global oil supply growth is likely to slow as already announced declines in OPEC+ production as well as lower expected production growth from the U.S. due to lower rig count are experienced in the second half of 2023,” he wrote in a research note. “As inventories fall, we expect oil prices likely rise and could rise into the $90 barrel range.”
So far this year, the Baker Hughes Oil Rig Count—a widely watched measurement of the number of active drilling rigs—has declined 15 percent to 529. This is the lowest level since March 2022 and is down from the peak of 624. The number of oil rigs decreased by 16 in July, marking the eighth consecutive monthly decline.
In a recent report, the EIA noted that capital expenditures by publicly traded oil firms inched toward 2019 levels this year, but the steady fall in rig counts “suggest activity could decline.”
Despite a 25 percent increase in the number of large worldwide oil and gas projects underway, “production gains remain elusive,” according to Goldman Sachs Research.
“That means we are still paying for underinvestment in the 2015 to 2021 period. Even with the capex increase, it’s very unlikely that non-OPEC producers can come back to growth,” said Michele Della Vigna, head of Goldman Sachs natural resources research.
Meanwhile, Mr. Flynn thinks oil prices could touch $100 “as we get closer to winter,” which could put more pressure on gasoline prices.