ANALYSIS: Gas Prices Surge as Crude Oil Enjoys Best Month in a Year

A man uses a gas station in Columbia, Md., on May 17, 2023. (Madalina Vasiliu/The Epoch Times)

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.

The national average cost for a gallon of regular-grade gasoline rose to $3.78 on Aug. 1, up more than 6 percent from a month ago, according to AAA. Year-to-date, gas prices have surged by 17 percent, although they’re 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,“ AAA spokesman Andrew Gross said 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 that ended on July 21, according to Energy Information Administration (EIA) data. That’s up 5 percent from the same time a year ago.

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.

An oil refinery displays an American flag in Wilmington, Calif., on Sept. 21, 2022. (Allison Dinner/Getty Images)

“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,” Patrick De Haan, head of petroleum analysis at GasBuddy, said 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 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 energy powerhouse has been enduring the lion’s share of the extra voluntary oil production cuts agreed to by OPEC members and its allies, known as OPEC+. While the market consensus is that Riyadh will maintain cuts, there’s 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 to 12.4 million bpd. That 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.

The Biden administration continues to deplete the Strategic Petroleum Reserve (SPR). This year, the reserve has dropped by about 7 percent to stand at less than 347 million barrels, the lowest level since August 1983.

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 sun behind a crude oil pump jack in the Permian Basin in Loving County, Texas, on Nov. 22, 2019. (Angus Mordant/Reuters)

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.”

“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,” Warren Patterson, head of commodities strategy at ING, wrote in a July 25 research note.

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.”

So far this year, the Baker Hughes Oil Rig Count—a widely watched measurement of the number of active drilling rigs—has declined by 15 percent to 529. That’s 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.

Mr. Flynn thinks oil prices could touch $100 “as we get closer to winter,” which could put more pressure on gasoline prices.