U.S. motorists are enduring more pain at the gas pump during the typically busy driving season as prices extended their gains amid a rally in the global oil market.
Industry observers say 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, while Marathon Petroleum’s Texas refinery has been offline since mid-May. The high temperatures are amplifying refinery challenges in Louisiana and Texas as the equipment is outdoors and exposed to excessive heat this summer.
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 about $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 by 16 percent. The WTI contract also turned positive on the year last week, climbing by more than 1 percent year-to-date.
In the first half of the year, crude prices had been trending downward, driven by recession fears, the banking turmoil, and a lackluster Chinese economic recovery. However, traders are “waking up and smelling the coffee” by pricing in the “reality” of a coming global supply deficit, according to 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, noting 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 SPR drawdowns further distorted energy markets by releasing oil “that discouraged investment” because the supply release “was smoke and mirrors,” Mr. Flynn noted.
China 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 gross domestic product growth rate came in at 6.3 percent, less than the consensus estimate of 7.3 percent.
But analysts say investors have been ebullient over crude demand. In June, oil imports reached 12.67 million bpd, up by 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.”
Year-End Prices
What a difference a month can make. After settling below $68 per barrel on June 27, oil prices have added roughly $13 to the WTI price.A chorus of market observers don’t think the rally has finished.
Rob Thummel, senior portfolio manager and managing director at Tortoise, believes that crude prices could climb to the $90-per-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.”
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.
Mr. Flynn thinks oil prices could touch $100 “as we get closer to winter,” which could put more pressure on gasoline prices.