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Market Monitor – Gasoline Prices Surge on Higher Crude Oil Costs and Increased Motor Fuel Demands

Wholesale gasoline prices have jumped by more than 50% over the past ten months to their highest levels in more than three years as rising crude oil prices and increasing motor fuel demands boost prices. By far the largest cost component that goes into producing a gallon of gasoline is the input cost of crude oil, specifically West Texas Intermediate (WTI) here in the US. The more than 60% jump in global oil prices over the same time period, is the primary factor underpinning the increase in motor fuel costs.

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Crude oil prices have surged on the back of declining global oil and fuel stockpiles due to:

  • a 1.8M barrels per day (bbls/d) production cut put in place by OPEC and Russia since early 2017,
  • an increase in global oil and fuel demands of ~1.5Mbbls/d,
  • elevated motor fuel demands from improving US economic conditions,
  • record US motor fuel demand of nearly 9.9M bbls/d in April 2018, and
  • Year to date (YTD) gasoline demand more than three percent above a year ago levels.

The combination of producer output cuts and increased demand have sharply reduced the massive supply glut that existed in the market place in late 2016. These factors have pushed wholesale gasoline prices back above the $2.00 per gallon level and retail pump prices to above $3.00 in many areas of the country. Further, the record gasoline demand level occurred well before the start of summer driving season, a strong indicator that demand could further increase this summer. Recent reports indicating that producers will look to extend their production cuts into 2019, should they dovetail with increased demand levels, point toward a potential for even higher oil and fuel prices in the coming months.

Increased geo-political risks have also contributed to the energy markets’ strong rally over the course of the past year, including:

  • events in Syria that have sparked concern surrounding US-Russian relations,
  • tensions between North Korea and the US,
  • missile attacks directed against Saudi Arabian oil infrastructure sites,
  • unrest in Venezuela that has reduced that countries oil production levels,
  • possible US sanctions against Iran, Russia or Venezuela

All of these have contributed to elevated risk, but if sanctions are imposed, more than 500,000 bbls/d could be removed from global oil supplies and help to further boost prices in the coming months.

Although there is a potential for slightly higher gasoline prices during the remainder of 2018, a significant part of this year’s increase appears to have already occurred. One factor that will help mitigate a further jump in motor fuel prices is increased US crude oil production levels. US output has reached a record high at 10.5M bbls/d and it is expected to increase by another 500,000 bbls/d or nearly five percent to 11M bbls/d by the end of this year (according to the DOE). This will help to reduce the effect of the OPEC and Russia production cuts in the coming months. In addition, concerns surrounding a potential trade war between the US and China could impact global economic growth and reduce energy demands. Ample stocks of motor fuel could also help stave off a further increase in gasoline prices this year. Domestic gasoline stockpiles are more than five percent above their five-year average as we head into the summer driving period. This will help to meet the expected increase in demand in the coming months. The potential for a large pullback in gasoline prices does exist, albeit a very slim one, if the market witnesses a combination of a sharp drop in demand due to a major global trade war and larger than expected increase in US shale production levels throughout the remainder of this year.

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