California’s average gasoline price hit $6 a gallon on Tuesday for the first time, and JPMorgan analysts are warning the price could hit the national average before the summer is out.
The startling forecast comes as gas prices in the United States hit record highs following Russia’s invasion of Ukraine, casting a shadow over the economy.
There is a real risk that the price will hit more than $6 a gallon by August, Natasha Kaneva, head of global oil and commodities research at JPMorgan, told CNN on Tuesday.
With U.S. gasoline inventories at their lowest seasonal levels since 2019, JPMorgan fears it may be difficult to meet intense demand during this summer driving season.
With expectations of strong demand driving, the US retail price could rise another 37% by August, JPMorgan wrote in its report, aptly titled Cruel Summer.
The national average for regular gasoline rose another two cents on Tuesday to a record high of $4.52 a gallon, according to AAA. That leaves pump prices up 15 cents last week and 44 cents in a month.
Really cheap gas is getting much harder to find. Georgia, Kansas and Oklahoma, the last three states with an average price below $4 a gallon on Monday, all crossed that threshold in Tuesday’s reading.
California’s average regular gas price rose above $6 a gallon in Tuesday’s AAA reading. The state average of $6.02 a gallon is up sharply from $4.13 a year ago and $5.84 just a week ago. Many large cities pay more: the average is $6.07 in Los Angeles County and $6.27 per gallon in San Francisco.
Even in California, 52% of stations sell gas for less than $6 a gallon, and nearly one in four stations cost $5.75 a gallon or less. Stations that charge much higher prices inflate the average.
High-priced resorts that charge far more than general market prices aren’t limited to California. Gas is selling for more than $5 a gallon in 29 states, according to OPIS, the service that collects gas price data for AAA. Six of them, Alaska, Hawaii, Nevada, Oregon, Washington and California, have a state average above that mark. So drivers nationwide might see some stations at or near $6, even though the national average is never that high. These station owners are happy to sell fewer gallons as long as they can get a higher price.
It is important to note that this is only a forecast.
Others in the industry are skeptical of the price increase for the simple reason that some Americans would probably balk at $6 in gas and drive less.
Getting to $6 is tough, Andy Lipow, president of Lipow Oil Associates, told CNN. Before we get to that, we would have significant demand destruction, not just here, but around the world.
Patrick De Haan, head of oil analysis at GasBuddy, echoed that sentiment saying: I personally think we’ll see a recession before we see a national average of $6.
DeHaan said disagrees with JPMorgan at least, not yet. However, given the growing imbalance between supply and demand, he conceded, I don’t think much is impossible in this market.
JPMorgan acknowledged that a caveat to its forecast is that demand could continue to fall short of our expectations. So far this year, gasoline demand has been below JPMorgan’s initial expectations of around 500,000 barrels per day on average.
But it’s hard to know precisely how consumers would react, given that Covid-weary families are eager to get out this summer and face a choice between high gas prices and sky-high airfares.
Federal government forecasters expect gasoline prices to drop below $4 a gallon in the second half of the year. The US Energy Information Administration forecast last week that the national average would fall to $4.81 per gallon in the third quarter and $3.59 per gallon in the last quarter of the year.
The problem is that refineries are struggling to produce all the gasoline they need right now. There is less refining capacity in the United States and Canada today than before the pandemic, as some refineries have closed permanently and others are converted to refine renewable fuels rather than crude oil.
JPMorgan notes that East Coast gasoline inventories are at their lowest level since 2011. The main driver of the inventory reduction is higher-than-normal gasoline exports, bank analysts said.
As high as prices are in the United States, they are much higher in Europe, which is dealing with the loss of supply from Russia. This is a major factor driving up exports from US and Canadian refineries that would normally supply gas stations in the eastern US.
If exports persist at this high rate and refineries are already operating near the upper range for reasonable utilization rates in line with our expectations, gasoline inventories could continue to decline to levels below 2008 lows and retail gasoline prices could climb to $6/gallon or even more, the JPMorgan analysts wrote.
Based on those assumptions, total U.S. gasoline inventories could fall below 160 million barrels by the end of August, the lowest level since the 1950s.
Such a drop in inventory suggests a 37% rise in prices, translating to a national average of $6.20 a gallon, the bank said. And at those levels, gas prices would explode beyond their inflation-adjusted peak of $5.38, set in June 2008, according to the EIA. The price reached $4.11 at that time, unadjusted for inflation.
JPMorgan said unless refineries immediately cut exports and shift production to gasoline, U.S. consumers shouldn’t expect much of a reduction in prices at the pump through the end of the month. year.
One thing that could limit gas prices, if not lower them, would be if the US economy slows down or falls into recession. Strong job growth is one of the factors pushing gas prices up as more people drive to work and have money to spend on gas. If the employment trend reverses, it would keep gas from rising, but at a terrible cost.
The only wild card that could raise gasoline prices is if major hurricanes hit US refineries and oil rigs along the Gulf Coast. The government’s official outlook for the upcoming hurricane season is due out next week.
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