Commodities Corner: Gasoline prices may climb this year to their highest level since 2014

This post was originally published on this site

Gasoline prices at the pump have seen their strongest start to a new year since 2014 and have the potential to top $3 a gallon on average for the first time in six years, regardless of what happens in the Middle East.

At the start of 2020, retail prices for regular gasoline averaged $2.58 and may climb from 35 cents to 75 cents a gallon, even without worsening tensions in the Middle East, says Patrick DeHaan, head of petroleum analysis at fuel-price tracker GasBuddy.

On Friday morning, the U.S. average for regular gasoline was $2.634 a gallon, up 37.6 cents from a year ago, according to GasBuddy. Futures prices for reformulated gasoline, meanwhile, saw their front-month February contract RBG20, +1.15%  settle at $1.6527 a gallon on Thursday.

DeHaan’s forecast includes the potential for prices to rise above $3, and that could happen based on the typical “theatrics of seasonal spec gasoline changes and refinery maintenance,” says DeHaan. The U.S. government mandates the use of a more costly and more environmentally friendly blend of gasoline during the summer driving season.

Middle East tensions are a “bit of a wild card,” as they bring a “higher risk of violence spreading beyond the U.S. and Iran,” DeHaan says. “We’ve seen Iran go after oil infrastructure before, and that’s a primary risk that could occur again.”

Iran this week fired missiles at bases in Iraq where U.S. troops are stationed, in retaliation for the Jan. 3 U.S. airstrike near Baghdad airport that killed Iran’s Maj. Gen. Qassem Soleimani. If Iran took aim at oil infrastructure, oil markets could see a sharp reaction of at least “several percentage points, if not more,” given that President Donald Trump has made it clear that the U.S. would retaliate, DeHaan says.

Every $5-a-barrel increase in oil prices represents 10 cents to 15 cents a gallon more paid at the gas pump. However, the risks of war and oil-supply disruptions have eased. There were no U.S. casualties from the Iranian attack, and Iran appears to be standing down, according to Trump.

Read: U.S. slaps sanctions on Iran’s metal industry and top officials

Oil prices had rallied shortly after the U.S. airstrike, then swiftly gave up those gains in the wake of Iran’s retaliatory attack, with U.S. prices down nearly 5% on Jan. 8.

“The geopolitical fear bid supporting the gains in the energy markets in the front half of the week vanished much quicker than most analysts anticipated,” says Tyler Richey, co-editor at Sevens Report Research.

“We maintain a cautious bias to the [oil] upside in the near-to-medium time frames, but more sideways trading, like we saw for the bulk of 2019, is very possible as we continue through the first half of 2020,” he says. “For gasoline, that also means more sideways trading and a longer time frame” for retail prices to climb back toward $3.

That, along with the fact that these events have occurred during a historically slow period for gasoline demand, may be good news for consumers.

“The Middle East tensions will impact gasoline prices on the margin rather than directly, and through an increased risk premium in oil markets going forward,” says Ryan Fitzmaurice, commodities strategist at Rabobank, adding that the impact to consumers will probably become apparent in the summer, when demand is high.

Rabobank expects the national average for retail gasoline to approach $3 in June and July, says Fitzmaurice. The average rose to a high at nearly $2.98 in May 2018, but it hasn’t climbed above that since late October 2014, according to data from GasBuddy.