By Avi Salzman
Drivers are forking over a quarter more for a gallon of gas than they did a month ago, a price-acceleration that some analysts predict could lead to $4 by May.
The average national price at the pump on Wednesday was $3.53 per gallon, according to AAA. J.P. Morgan strategist Natasha Kaneva thinks prices could rise above $4 in the next two months, because Russia is cutting its oil production more than expected.
Russia said earlier this month that it will take nearly 500,000 barrels of oil production offline by June, leaving its daily production around nine million barrels a day. The announcement has helped lift international crude oil prices 3% this month, to $86 per barrel. Kaneva thinks prices will stay at relatively high levels and could even test the $100 price level in September.
There are a lot of wild cards in the $4 price prediction, and the price of oil may not be the biggest one. So far this year, increases in oil prices haven't been the main reason for the surge in gas prices. The largest portion of the price increase can be attributed to the process of refining crude oil into fuel. While crude prices are up 12% this year, wholesale gasoline prices are up 28%.
The biggest winners from the price increases are refiners, which are benefiting from a decline in overall global capacity to turn crude into gasoline. The margin between the price of Brent crude, the international benchmark, and the price of gasoline, has widened to $28 from $13 at the start of the year, according to OPIS, the Oil Price Information Service. Shares of Valero Energy, a leading U.S. refiner, have risen 28% this year, including 17% in just the past month.
Refiners are benefiting from a shortage of refining capacity in much of the world. More refineries than usual in the U.S. have suspended operations for maintenance, causing refining capacity to slip, says Tom Kloza, global head of energy analysis at OPIS. And Ukraine has successfully knocked out a significant number of Russian refineries with drone attacks -- refining capacity of between 500,000 and 1 million barrels may have been damaged. Kloza called the attacks "the new wild card among catalysts."
Some problems with refineries overseas have also helped U.S. refiners. Venezuela has been importing a record amount of U.S. fuel because its own refineries are operating at reduced capacities after years of disinvestment, according to Kloza. Another benefit for refineries is that they can sell their higher-quality summer blend of gasoline at a larger premium to the winter blend.
Despite J.P. Morgan's bullish prediction for more increases, some analysts think the pace of the hikes will likely slow in the months ahead. Kloza thinks gasoline prices may take a pause soon as refiners ramp up capacity, fluctuating between $3.50 and $3.80 from April through October. The biggest unknown that could take summer prices higher is the weather -- extreme heat knocked out refining capacity last year, and hurricanes have also done damage before, causing gasoline prices to spike.
Kaneva thinks several factors could keep gasoline from rising above $4. If prices approach $4, the U.S. may begin to sell oil from its strategic petroleum reserve to add supply to the market and dampen the price increases, she wrote.
In addition, rising gasoline prices can cause demand to drop -- which itself can cause prices to fall. "The trajectory of U.S. gasoline demand is one of the most important metrics in determining the direction of both the global oil demand and global oil prices," Kaneva wrote. "We estimate that a surge in U.S. gasoline prices towards $4/gallon and beyond could potentially shave off 200,000 barrels a day of gasoline demand in summer."
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
March 27, 2024 12:55 ET (16:55 GMT)
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