For those Americans who are planning a summer driving trip, be aware gasoline prices are forecast to be higher.
AAA says the current nationwide average price at the pump is $2.38 for a regular gallon , which is up about 6 cents from a month ago and up 17 cents from a year ago.
“As gas prices continue to reach new heights and hit an all-time high for the year, the summer demand has not kicked in, meaning consumers can expect the price at the pump to continue to rise for coming weeks,” according to the group.
With Memorial Day seen as the unofficial start of summer, and with that, the unofficial start of summer driving season, energy market watchers say consumers should be on the lookout for prices to drift up based on expected demand patterns.
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Any production outages, such as oil refineries going offline or potential disruptions in oil-producing countries, could cause gasoline prices to temporarily spike, they add.
Behind the rise. Forecasts for higher crude oil prices versus last year are partially responsible for the gasoline price outlook. The Energy Information Administration expects the retail price of regular-grade gasoline to average $2.46 per gallon during summer 2017, up from an average of $2.23 last summer.
“Gasoline prices are forecast to be higher this summer compared with last year primarily because of Brent crude oil prices, which are expected to average $8 per barrel higher than during last summer,” the agency said in its recent summer fuels outlook report. The agency is the statistical arm of the U.S. Department of Energy.
The higher crude oil price forecast comes on the back of OPEC nations cutting production to alleviate a global supply glut. Both Saudi Arabia and key non-OPEC producer Russia have complied with announced production cuts, according to media reports.
Phil Flynn, senior market analyst and energy specialist for The Price Futures Group in Chicago, says the cuts are significant for global production, which will eventually affect pump prices.
“We have compliance rating of 105 percent. Saudi Arabia is cutting more than they were supposed to, (in order) to make time for the guys who were supposed to have production cuts,” Flynn says. “This has been the most successful production cut in history. Even though it’s not cut into supplies yet, there’s a false perception in the marketplace that U.S. producers will be able to replace OPEC production cuts.”
With crude oil prices around $50 a barrel, that’s spurred U.S. shale oil producers to restart rigs that were idled when energy prices fell sub-$30 a barrel. That’s put a cap on oil prices going much higher, but Flynn points out that shale production depletes quickly.
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Winter demand for gasoline was consistent, say analysts at Goldman Sachs in a research report, but elevated gasoline inventories caused initial concerns that spring demand would be muted. There was a dip in gasoline demand in early spring, as seen in the March retail sales report.
However, both Flynn and the Goldman Sachs analysts are more optimistic on demand, with Goldman saying the concerns are overplayed.
Flynn says demand data may be understated.
“I believe the demand for gasoline is a lot stronger than people think it is,” he says, adding that some of the muted demand could be explained by poor weather in major driving states like California and not fully reflect new export markets.
Going forward, Goldman says, expect “robust increases” in personal consumer expenditures, which led the firm to forecast a rise in gasoline demand growth this year.
Flynn also says lower unemployment and an improving economy helps with gasoline demand. Further, he says, with record auto sales in 2016 and strong sales of less fuel-efficient vehicles like SUVs, higher demand is likely.
Americans may not mind higher prices. Mike Ciccarelli, commodity and stock trader at Chicago-based Briefing.com, also expects an increase in crude oil and gasoline prices for the summer, in line with Energy Department estimates.
“This (price) growth won’t get (consumers) that mad. The increase versus what we were used to last summer is a little more than 10 percent higher if these estimates stick,” he says.
While Flynn says the OPEC cuts could lead to higher crude oil prices down the road, Ciccarelli isn’t as bullish. He says when OPEC announced the cuts in November, prices rallied as high as $57 a barrel, but now they’re back to where they were pre-announcement.
“Clearly even with the OPEC deal, it didn’t put oil prices higher,” he says. “Imagine if they didn’t cut.”
Ciccarelli says he doesn’t see gasoline prices going much higher than the Energy Department estimate of $2.46 this summer, and if OPEC compliance wanes or demand wavers, prices will fall. He says every $1 in sustained crude oil price change translates into a 2.4 cent-per-gallon change in gasoline prices.
Flynn is a little more optimistic on higher gasoline prices, estimating them at $2.50 to $2.55, nationwide, roughly 12 to 17 cents a gallon up from current levels. Although prices will be up from last year’s levels and current prices, he agrees with Ciccarelli that Americans may grumble but won’t change their summer driving plans.
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“When it comes to the summer driving season, people want to be on vacation, and they don’t care as much,” Flynn says. “I don’t think we’re at the point of pain where we were a few years ago when gas at $4 a gallon. We’re down from the historic highs and the economy is better.”
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Gasoline Prices Likely to Rise This Summer originally appeared on usnews.com
