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JP Morgan analysts predict gas will surge past $6 this summer

What do economists have to say?
Gas Prices
Posted at 8:25 AM, May 19, 2022

SOUTHFIELD, Mich. (WXYZ) — AAA said the average price of a gallon of regular gas hit $4.58 on Thursday, setting a new record high in the U.S. Could prices be headed even higher to more than $6 a gallon? JP Morgan analysts think so.

JP Morgan analysts are warning as global demand for oil surges due to the war in Ukraine, oil companies in the U.S. are selling more gas to other countries.

“Typically, refiners produce more gasoline ahead of the summer road-trip season, building up inventories. But this year, since mid-April, U.S. gasoline inventories have fallen counter seasonally and today sit at the lowest seasonal levels since 2019,” said the JP Morgan Global Commodities Oil Flashnote, published this week.

“If exports persist at this elevated pace and refinery runs — already near the top of the range for reasonable utilization rates — fall within our expectations, gasoline inventories could continue to draw to levels well below 2008 lows and retail gasoline prices could climb to $6/gal or even higher,” the report warned.

Three economics experts weighed in on the report and offered varied opinions.

University of Michigan Economic Forecaster Gabriel Ehrlich is optimistic that prices will not go that high.

“That kind of prediction gets a lot of attention. My prediction is we won’t get that high this summer,” said Ehrlich.

University of Central Florida Economic forecaster Sean Snaith is less optimistic.

“I think $5 is likely and $6 is not out of the question,” said Snaith.

“It is tough to know what to expect,” said Nicholas Juhle, Greenleaf Trust Chief Investment Officer. “It is important to understand that crude oil prices account for about 60% of the cost of a gallon of gas you buy at the pump.”

So what drives crude oil prices? Economists say it is about global supply and demand. There are many unknowns that could impact supply and demand in the coming months.

One of those unknowns is war. Russia’s invasion of Ukraine took a lot of supply out of the market.

“We don’t know how the war is going to unfold. Is it going to be prolonged? Will it end soon? Will Russia escalate the war? Certainly, the risks surrounding that are a big part of why prices are so high right now and why there is a risk they could go even higher,” said Ehrlich.

The International Energy Agency says Russia is the world’s third-largest oil producer behind the United States and Saudi Arabia. Before the invasion, it was the second-largest crude oil exporter in the world, behind Saudi Arabia.

“If we find ourselves not only in a war but in World War III, with additional participants, additional sanctions go on, the entire European Union bans energy from Russia. You kind of go down a list of how bad it could get,” said Juhle.

Another unknown is just how much an increase in gas prices will decrease demand and increase supply. So far domestic oil companies and OPEC have not ramped up production.

“Two of the swing producers we would typically expect to make up that supply are not responding in a big way right now. OPEC has been very reluctant to increase supply quickly. And normally we would look to them to increase oil supply. And then in the United States shale oil producers have been reluctant to expand drilling activity,” said Ehrlich. “So, one of the reasons it is tough to predict what is going to happen with prices is we haven’t seen the suppliers react to the high prices we already have.”

Ehrlich says the reason is that oil producers have been recently “burned” by a roller coaster of pricing levels. Oil prices plummeted during the pandemic. The higher prices right now are resulting in high profits. Expanding drilling would require investment.

Snaith says the U.S. and other nations have sent a message that fossil fuel is not a long-term solution, given the concerns about climate change. He says this affects confidence in the oil market’s value as companies consider investing to increase supply.

“The harsh rhetoric and some of these policy actions of the Biden administration have some of these drillers hesitant,” said Snaith.

Another unknown is the weather. Will hurricane season be bad?

“If we were to have a massive hurricane down on the gulf coast, which could take our oil platforms and refineries offline, both of those things would have an upward effect on gas prices at the pumps,” said Juhle.

This article was written by Kim Russell for WXYZ.