Rising gas prices have been a concern for consumers, the Federal Reserve, and the Biden administration. Those expecting gas prices to come down were in for a rude shock when average gas prices in the U.S. hit a record high over the Memorial Day weekend.
Higher gas prices are stoking inflation globally and hurting retail spending on non-discretionary goods. Why are gas prices still going up and will they come down after Memorial Day as the U.S. summer driving season begins?
Why are gas prices still going up?
Two recent factors have led to a spike in crude oil prices and by extension, gas prices. First, the EU has decided to ban most crude oil imports from Russia. The block buys over a third of its crude oil from Russia and will now look at alternate supplies to bridge the gap. That could be easier said than done given the already bleak demand-supply situation in the global energy markets.
Second, China, which is the world’s second-largest oil consumer and the biggest importer, is now gradually opening up. As the strict lockdowns ease, the country’s oil and gas demand will also rise.
The combination of both these factors along with an escalation in the Russia-Ukraine war is putting upwards pressure on gas prices in the U.S. The recent weakness in the U.S. dollar hasn’t helped matters. Commodities like oil tend to have a negative correlation with the U.S. dollar. Incidentally, a weaker U.S. dollar was among the reasons why gas prices were so high in 2008.
U.S. gas prices hit a record high on Memorial Day.
According to AAA, regular unleaded gas prices in the U.S. averaged $4.619 per gallon on Memorial Day, which was a record high. However, diesel prices averaged $5.523 on the day, which was slightly below the all-time high of $5.577 that they hit on May 18. The divergence between gas and diesel prices is due to the shortage of diesel in parts of the U.S. in May.
The U.S. summer driving season has started and will run until Labor Day in September. High gas prices, combined with soaring inflation which is hurting American families' monthly budgets, are also having a negative impact on gas demand.
Will gas prices come down in June?
The probability of gas prices coming down quickly in June after Memorial Day looks bleak. As Russia ups the ante in Ukraine and tries to wind up its invasion of the country, we could see more Western sanctions on the country. Also, Russia might try to weaponize its energy exports further after banning natural gas exports to Poland and Bulgaria.
Markets also don’t seem to believe that gas prices are coming down anytime soon. Legendary investors Warren Buffett and Stanley Druckenmiller have been loading up on oil and gas stocks, even as the latter has bet against the wider U.S. markets.
Here's the latest gas price prediction.
JPMorgan commodities analyst Natasha Kaneva expects a “cruel summer” and forecasts that U.S. average gas prices could rise to $6.20 per gallon by August. The analyst’s gas price prediction is at odds with the EIA, which expects Brent to average $107 per barrel in the second quarter of 2022 and fall to $103 per barrel in the second half of the year.
However, the EIA, which completed its outlook on May 5, added that the forecast is “highly uncertain.” It said that sanctions on Russia and their impact on its oil and gas production and exports remain the wild card for global energy prices.
It won't be easy to replace Russian oil and gas supplies in a hurry given the country's massive share in the global markets. The lack of alternative supplies could mean that U.S. consumers might continue to pay high gas prices even after Memorial Day.