Will gas prices continue to fall?

Drivers have seen it at the pump, and Biden administration officials have repeatedly touted it in recent days: Gasoline prices are falling, and have been for weeks.

While the price drop is a welcome respite for Americans whose budgets have been stretched by higher costs for almost everything, it’s reasonable to ask: Will this last?

Gas prices are averaging $4.41 a gallon nationwide as of July 22. according to the American Automobile Association, down from last month’s peak of more than $5 per gallon. Although gas prices have been falling for more than 30 straight days, the national average is still significantly higher than a year ago, when prices averaged $3.16 a gallon, according to AAA data. Diesel prices have also averaged $5.46 a gallon since July 22, down from $5.81 a month ago.

Rising gas prices were a key inflation driver. A government report released last week showed that a surge in energy prices in June fueled a large spike in inflation as the The consumer price index rose by 9.1 percent a new four-decade high compared to the previous year. fuel prices rose after oil demand rebounded from pandemic lows and Russia’s invasion of Ukraine pushed oil prices higher.

Several factors have pushed gas prices lower, including a fall in oil prices amid mounting recession fears and a lesser-than-expected impact of Western sanctions on Russia. Supply has also improved relative to demand, which has declined slightly in recent weeks and is reported to remain at lower levels than a year ago US Energy Information Administration data.

Biden administration officials have been quick to call the price drop a success and forecast prices will continue to fall, although they note risks remain. Jared Bernstein, a member of the White House Economic Advisory Council, said the fall in retail gas prices was “not a daily blip”.

“We think it’s reasonable to expect that more service stations will lower their prices in response to lower input costs and thus, barring unforeseen market disruptions, average prices will fall below $4 per gallon in more locations in the coming weeks,” Bernstein said said Monday at a press conference at the White House. He also pointed to measures the government has taken to address the rising costs, such as releasing millions of barrels from the country’s strategic oil reserve.

So did Amos Hochstein, a senior adviser to the US State Department on energy security said on CBS Face the nation on Sunday that he expected average national gas prices to fall further to as low as $4 a gallon.

However, energy prices are very volatile, making it difficult to make predictions. Energy analysts and economists say it’s probably too early to tell if prices will fall further in the coming months, and there’s reason to believe the downturn may not last.

“It helps that prices are going down, but I wouldn’t do a lap of honor just yet,” said Abhi Rajendran, director of research at Energy Intelligence.

Here are four factors that could affect gas prices in the coming months.

1) How people (particularly investors) think about the economy as a whole

A big reason oil prices have fallen is that investors have become more concerned about a possible recession in the United States and a global economic downturn.

Anticipating future demand is a key driver of oil prices, said Christopher Knittel, a professor of energy economics at MIT. Recession worries have caused a slump in the crude oil market, causing retail gas prices to fall.

One of the biggest factors to watch is the strength of the US economy. fears of a recession have risen as the Federal Reserve continues to aggressively raise interest rates to contain inflation. By making borrowing more expensive, the central bank hopes to dampen consumer demand for goods and services, which should contribute to falling prices.

But the Fed risks going too far with its policies, potentially triggering a recession as consumers cut spending and economic growth slows.

“If markets believe there will be a recession next year, that’s starting to move oil prices today, even though demand will fall next year,” Knittel said.

Investors will be watching indicators like next week’s gross domestic product report, which will show whether the US economy contracted or expanded in the second quarter, said Omair Sharif, founder of research firm Inflation Insights. (Two quarters of declining GDP growth is a common rule of thumb for determining when the US is in a recession, although there is one aggravating factors.) They will also watch for changes in consumer spending, Sharif said. If spending shows signs of falling by more than expected amounts, it could exacerbate recession fears and lead to lower gas prices.

Investors will also be watching the Fed’s monetary policy meeting next week, Sharif said, when central bank officials are expected to announce it another rate hike of 0.75 percentage points. Investors will be keeping a close eye on Federal Reserve Chair Jerome Powell’s comments on how aggressive the Fed’s rate hikes will be in the coming months. If larger rate hikes are imminent, it could increase fears of a recession on Wall Street.

“They are likely to sell oil and other commodities,” Sharif said, “which could drive down gasoline prices.”

2) The impact of sanctions on Russian oil

So far, sanctions on Russian oil have had less of an impact on global supply than originally anticipated Russia was able to export discounted oil in countries like China and India. Nevertheless, European sanctions could further strain the already scarce global oil supply in the coming months.

The European Union will be complete in December Ban on Russian sea shipments of crude oil, and in February the EU will ban supplies of refined oil products from Russia. The embargo should apply until the end of the year 90 percent of the bloc’s Russian oil imports. A ban on insurance for ships carrying Russian oil is also being phased in, making it more difficult for Russia to export oil products around the world.

Oil prices could rise because of these tightening sanctions, said Kevin Book, a managing director at ClearView Energy Partners. “You might start to see a race to get casks when people think maybe that’s going to be a real deterrent to world supplies,” Book said.

3) The weather on the Gulf Coast

The National Weather Service predicted this year’s hurricane season would be more active than usual. So far it has spawned three named tropical storms, fewer than last year. But it’s early days, and a hurricane along the Gulf Coast could at any moment take out a refinery, the processing plants that turn oil into petroleum products like gasoline and diesel.

Tom Kloza, the global head of energy analysis at the Oil Price Information Service, predicted gas prices would fall further into the weekend but said any signs of a storm threatening refineries along the Gulf Coast could jeopardize that trend.

That could be “devastating to supply” and potentially push fuel prices past last month’s peak of $5 a gallon, he said.

“I don’t think this is a big downtrend that will last,” Kloza said. “I think we might have another act.”

4) US gas demand

People drive more in the summer, so Rajendran, the director of Energy Intelligence, said prices would rise rather than fall by Labor Day. He said it’s also possible that falling gas prices will increase demand, which could push prices higher again.

Although some regions of the country are already seeing gas prices fall below $4 a gallonRajendran predicted that the average national gas price would likely fall above $4.50 before tapering off and reaching $4 a gallon or less by the end of the year as demand eases.

Patrick De Haan, head of petroleum analysis at GasBuddy, said national gas prices could fall below $4 a gallon in mid-August if gas demand doesn’t increase, the country avoids a major hurricane and the economy continues to show signs of slowing. However, De Haan said costs could rise again if the country gets better-than-expected economic data in the coming weeks, spurring a rally. And consumers hoping that gas prices will average back to somewhere between $2.75 and $3.25 a gallon might wait a while, he said.

“Americans have seen gas prices fall five weeks in a row, but that doesn’t mean we’re still straight,” De Haan said. “I don’t think we’re going to go back to what most Americans think is normal on gas prices until there’s some sort of settlement between Russia and Ukraine.”

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