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MARK-TO-MARKET: What’s behind the rise in gas prices?

MARK-TO-MARKET: What’s behind the rise in gas prices?

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The U.S. Energy Information Administration (EIA) defines the summer driving season as April through September. The season formally kicks into high gear after the Memorial Day weekend, when millions of Americans hit the open road, like the Griswold’s loading up the family truckster heading to Wally World. But gasoline prices have surged over the past few months and the EIA’s latest report warns that consumers should brace for higher prices at America’s gas pumps.

For this year’s summer driving season, the EIA expects a gallon of regular gas to average $2.78, a three-year high. However, this initial estimate may quickly be revised higher. Currently, the national average already stands at $2.85/gallon. The national average has risen $0.61 (27%) since January and $1.04 (58%) over the past 12 months.

As one might expect, gasoline prices vary extensively across the 50 states. According to data from GasBuddy and the American Automobile Association, California holds the distinction for the highest average cost for a gallon of regular gas at $3.98. This is followed by Hawaii ($3.67), Nevada ($3.42), Washington ($3.40) and Oregon ($3.20).

On the other side of the price spectrum is Mississippi, whose $2.56/gallon cost is the lowest in the nation. Rounding out the Top 5 cheapest states are Texas ($2.57), South Carolina ($2.58), Louisiana ($2.59) and Oklahoma ($2.60).

To further stoke the Iowa vs. Illinois rivalry, Iowa ranks No. 27 at $2.79/gallon. Sorry, Fighting Illini fans, Illinois ranks a rather dismal No. 43 at $3.08 with the average price in Chicago skyrocketing to $3.38/gallon. Here in the Quad-Cities, the price you pay at the gas pump is heavily dependent on which side of the river you fill up. On the Iowa side, the average is $2.78/gallon. On the Illinois side, the average is $0.22 (8%) higher at $3.00/gallon.

Of the many distillate products derived from a barrel of crude oil, gasoline is by far the biggest output. Thus, the price of gas is heavily dependent on the price of crude oil. Here in the U.S., the benchmark grade of crude is West Texas Intermediate (WTI), which serves as one of the three main pricing barometers of the global petroleum industry, alongside North Sea Brent and Dubai crude. WTI is currently trading around $61/barrel, atop the $50-$60/barrel price range held for much of 2017-19.

The U.S. is the world’s largest consumer of crude oil, accounting for roughly 20% of the world’s consumption. In 2018, the U.S. surpassed both Russia and Saudi Arabia to become the world’s largest producer of crude oil. That production helped satisfy U.S. demand while keeping crude oil prices in check. Prior to the pandemic, the U.S. crude oil industry produced a record-high 13.1 million barrels per day. Today, that number has fallen to just 11 million. The EIA expects a slight increase to 11.4 million barrels per day by year-end.

U.S. producers are hesitant to ramp up production because of continued uncertainty over the global pandemic and a new regulatory environment expected under the Biden administration. Moreover, this reduction in U.S. production has not been offset by an increased supply from OPEC and Russia, who remain in a multi-year collaboration to reduce output to raise the price of crude oil. OPEC, or the Organization of the Petroleum Exporting Countries, is a 13-nation oil cartel led by its de facto leader Saudi Arabia. OPEC currently produces around 30% of the world’s crude oil.

As the U.S. and global economy continue to reopen, the demand for crude oil will increase. From that crude oil we derive a myriad of consumer and commercial products, such as jet fuel, heating oil, lubricants and, of course, gasoline. However, that increase in demand must be met with a corresponding increase in supply. If not, higher prices at our nation’s gas pumps may extend well beyond this year’s summer driving season.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, Davenport.

Disclaimer: Opinions expressed herein are subject to change without notice. Any prices or quotations contained herein are indicative only and do not constitute an offer to buy or sell any securities at any given price. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. Quad-Cities Investment Group LLC is a registered investment adviser with the U.S. Securities Exchange Commission.

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