Why Are Gas Prices Rising Again

Why Are Gas Prices Rising Again?

Freedom Financial Archive | Originally posted May 01, 2023
  • The real reason gas prices have been rising this year.
  • Volumes of product into the U.S. is dropping.
  • International Monetary Fund has reduced their growth estimates

Dear Reader,

When we look at gasoline demand around the world, we are seeing a broad reduction.

As we have been saying, we believe gasoline demand in Asia and North America will remain well off “normal”, which is made worse by the sizable drop in global distillate demand.

Distillate pressures will remain as economies face more headwinds, as inflation persists and underlying manufacturing flows are reduced.

When we start looking at global trade flows, the concerns only grow when considering crack spreads and Russian/Chinese flows.

Volumes of Product Into the U.S. Is Dropping

Volumes of product into the U.S. is dropping to the beginning of COVID levels, and all indicators are pointing to more pain ahead.

As you can see in the chart below, inbound containers at key California ports haven’t been this low since March 2020.

When we turn to shippers, we can see that the demand indicators for the next few months point to more pressure on global trade.

The reduction in demand, which we are seeing globally based on export/import data, is also driving down basic rates.

The reduction in volumes is driving down rates across multiple shipping types, and helps to drive home the weakening economy.

Even as the economy slows, we aren’t seeing prices fall in commodities to the same degree, because of the broader supply shortfalls. We have shortfalls in grains, as well as crude to a degree, driven by OPEC+ cuts.

Russia had no choice to reduce their flows as their storage is maxed out and access to pipelines are diminished. The shifts are causing a problem on gasoline pricing – especially in the U.S., which will also hinder underlying demand heading into the summer months.

A significant amount of gasoline is still “trapped” in Europe, and as shipping rates drop – it will unlock more flows from Europe into the U.S.

Average Price of Regular Unleaded Gas Increasing in 2023

Looking at the chart below, you’ll see that the average price of gasoline (white line) has steadily increased for much of 2023, currently landing at $3.684 for regular unleaded fuel.

Russia is also sending more product into traditional U.S. export markets, which will push more U.S. product into Europe.

This is going to cause a sizable drop in U.S. exports of gasoline and diesel, and we are starting to see more cracks in the European markets.

Part of Europe’s benchmark diesel futures curve shifted into a more bearish structure.

  • ICE Gasoil futures from July to October are now in a contango pattern
  • NOTE: A contango structure is when prompt contracts are cheaper than those for delivery at a later date

It’s all just more support around the weakness in the economic backdrop.

IMF Has Reduced Their Growth Estimates

The International Monetary Fund (IMF) has begun reducing their growth estimates, and we believe they will continue walking back GDP numbers throughout the next few months.

Inflation is remaining sticky around the world, which is causing Central Banks to maintain their hawkish stance. We still believe that the IMF is too aggressive on their growth, but we do agree with their view on 2023 into 2024.

They are showing limited growth year over year, which is something that is very likely given the strain on the underlying economy.

Thanks for reading,

Freedom Financial News