Oil: Lower Demand, Production Cuts Create Unusual Stability in Gasoline Prices

• Gasoline prices in the U.S. remain steady at $3.50 per gallon despite typical summer fluctuations
• Lower global oil demand, higher interest rates, and Saudi Production cuts offset each other, keeping oil prices stable
• Potential hurricane disruptions and China’s economic activity could influence gasoline prices in the coming months

Something unusual is happening with gasoline prices in the United States this summer. The national average for the price of a gallon of gasoline has barely moved in either direction. According to GasBuddy, prices have been rangebound since April, but since the July 4 holiday have remained uncharacteristically stable at $3.50 per gallon.

Typically, gasoline prices rise during the summer months because summer blend gasoline is more expensive to produce, and demand for gasoline is higher due to increased travel. Patrick DeHaan, head of petroleum analysis at GasBuddy, says the reason for this unusual price stability is because forces that typically push prices up or down have been offsetting each other. 

On the one hand, lower-than-expected global oil demand and higher interest rates are pushing oil prices down. On the other hand, Saudi Arabia’s unilateral production cuts of 1 million bpd in July and August are pushing oil prices up. The result is that oil prices have remained fairly stable in the mid to low $70s.

A good example of how issues like higher interest rates are keeping prices from rising on news that would typically push prices up occurred last week. On July 6, the EIA reported that U.S. crude oil stocks fell by 500,000 barrels more than was expected due to strong demand from refineries. 

This came after a draw of 2.5 million barrels of gasoline from U.S. gasoline inventories the week before when analysts expected a draw of just 1.4 million barrels. 

Typically, this kind of data would push oil and gasoline prices higher. However, this report coincided with news from the Federal Reserve that another interest rate hike was being considered. The potential for this to slow the economy offset the bullish EIA report, and oil prices ended up trading slightly lower.

There is always the chance that a hurricane on the Gulf Coast could disrupt oil production and transportation or refining. 

This would cause a temporary increase in oil and gasoline prices until the issues are resolved. Barring a weather incident, however, Patrick DeHaan is bearish on gasoline prices:

“As we near the end of summer, there will be more weight on weak demand, and that should lead to lower prices this fall.” 

Gasoline prices tend to decline in the fall as demand weakens. This may be offset this year by refinery maintenance and rising global oil demand. Many analysts and the IEA predict that China’s economy will improve in the second half of the year, and therefore oil prices will also rise. 

I remain skeptical that China’s economic activity is going to take off as much as analysts expect this year. If China’s economic activity falls below expectations, oil prices may remain below the $80 per barrel level. 

However, if inflation in the U.S. keeps cooling, then oil prices could rise in the fall, with gasoline prices following. Traders should pay attention to these competing factors and whether they continue to interact to keep oil and gasoline prices stable or not.

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Disclosure: The author does not own any of the instruments mentioned in this report.