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Bad news for drivers who were enjoying lower gasoline prices late last year: It appears that gas prices have bottomed out and are headed higher again. After dipping close to $3 per gallon shortly before the end of last year, the national average price of regular unleaded gas has bounced back to $3.29. Unfortunately, we think that trend will continue, with the national average price flirting with $4 per gallon sometime this spring. Why? For starters, crude oil prices have risen, likely on expectations of higher oil demand in China, now that the country’s COVID-19 lockdowns have largely been lifted. Also, refinery capacity in the U.S. remains strained. Even with plenty of crude oil available, there aren’t enough refineries to turn that crude into useful fuels like gasoline. And in general, retail gas prices tend to rise in late winter or early spring in advance of the busy summer travel season. The situation is even worse for truckers, with diesel prices now averaging $4.62 per gallon. Diesel has actually been declining a bit recently, but it remains unusually expensive. That affects virtually every good on store shelves since most freight travels by trucks or trains that run on diesel.
Oil prices are slowly rebounding from their drop late last year, with benchmark West Texas Intermediate crude trading at almost $80 per barrel. We think it’ll stay around that level in the near term, but it could break out higher later this winter. OPEC (opens in new tab) has shown a determination to reduce its oil exports to keep oil prices from dropping too much. Demand from China should increase this year. And U.S. energy companies are struggling to increase oil production. Their investors are pushing for less drilling and more cash going to dividends and stock buybacks. Meanwhile, energy policy in the U.S. continues to discourage long-term investment in oil and gas, as the White House talks up renewable energy.
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Natural gas prices are in the midst of an epic slump, but don’t bet on that to last too long. After peaking near $10 per million British thermal units in the middle of last year, the benchmark gas futures contract has tumbled to about $3.60 per MMBtu in recent trading. Warm weather in both the U.S. and Europe have depressed gas demand, at a time when it was expected to be strong. However, the recent price weakness could reverse quickly if colder weather returns. Europe continues to struggle to buy enough gas from alternate suppliers after Russia cut off most of its gas exports to the Continent. In the U.S., the world’s leading gas producer, stockpiles of gas in storage are still a bit low for this time of year. Any prolonged cold weather, either in Europe or here, will fire up demand for U.S. gas and likely cause prices to rise significantly.
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