Why you could pay $5 for gas even if oil doesn’t skyrocket
CNN
By Matt Egan, CNN
New York (CNN) — Gas prices are within striking distance of $5 a gallon, a painful threshold that seemed virtually impossible when the year started. And the high-demand summer driving season hasn’t even begun.
Some experts fear gas could break the all-time highs set in 2022, even though crude oil isn’t as expensive as it was after Russia invaded Ukraine four years ago.
“The risk of $5 gasoline can no longer be dismissed,” Natasha Kaneva, head of global commodities research at JPMorgan, wrote in a note to clients published on Friday.
In fact, gas is more expensive today than it was at this point in the calendar in 2022.
Gas prices have spiked from a national average of $2.98 a gallon when the war with Iran started, to $4.56 a gallon last week, according to AAA. Gas prices have since dropped, but only slightly, to $4.52 on Monday.
The war in the Middle East has led to a 10-week closure of the Strait of Hormuz, a critical chokepoint for energy, sparking instability in the global energy system.
‘A harsher reality’
Some argue that the oil market is underpricing the danger today.
Oil futures haven’t taken out their 2022 highs, which is a surprise given the scale of the supply shock.
Brent crude, the international benchmark, has surged from $70 a barrel in February to $104 today. But Brent went even higher, to $133 a barrel, in March 2022 following Russia’s invasion of Ukraine.
“Rather than complacency, the market may be acknowledging a harsher reality: a shock of this magnitude cannot be absorbed through the crude system alone,” Kaneva wrote in the report.
The thinking is that, unlike in prior shocks, the damage from this energy earthquake isn’t playing out primarily in oil futures. It’s been pushed beneath the surface — to gasoline, jet fuel, diesel and other energy products.
“The next phase of the shock then may look less like a classic crude spike and more like a refining and end-user fuel crunch,” Kaneva wrote.
In other words, gas could hit $5 a gallon without Brent reaching $150.
More jet fuel, less gasoline
Jet fuel has been ground zero for this shock.
In some regions, jet fuel has doubled in price, causing airlines to raise fares and cancel thousands of flights.
In response, refiners have ramped up jet fuel production to meet demand, rebuild inventories and capture sky-high profit margins on jet fuel.
However, that comes with a trade-off: More jet fuel production means less diesel and gas.
As JPMorgan notes, gasoline production is lower by about 340,000 barrels per day compared to a year ago. If supply is down and demand is the same, that leaves prices nowhere to go but up.
Diesel is also near all-time highs
It’s not just gasoline. Diesel is just 18 cents away from reaching its 2022 record high, according to AAA.
Tom Kloza, an independent oil analyst and advisor to Gulf Oil, told CNN that diesel will likely break its all-time high this month — potentially as soon as this week.
Kloza said it’s hard to ease diesel demand because it’s such a crucial fuel for the economy, powering everything from farm equipment and trucks to railroads.
The cost of filling up
The timing is brutal for drivers, with the summer driving season right around the corner.
AAA estimates a record 39.1 million people will travel by car this Memorial Day weekend, up just 0.1% from last year and nearly 4% from 2019.
Last year’s average gas price on Memorial Day was $3.18 a gallon. It cost about $44.50 to fill up a 14-gallon gas tank like those found on many compact SUVs and sedans.
The cost of filling up rises to $63 at current prices — and would go to $70 at $5-a-gallon gas.
Forcing open Hormuz?
JPMorgan thinks the energy market will eventually “force” the reopening of the Strait of Hormuz.
The bank estimates that global oil inventories are currently on track to “approach operational stress levels” in early June and fall well below where they were in 2022, when gas hit a record of $5.02 a gallon.
“Our conclusion is that one way or another, the Strait reopens in June,” Kaneva wrote in a separate report on Monday.
Reopening the Strait of Hormuz would provide an immediate boost to supply-starved energy markets. But neither prices nor supplies would immediately return to normal.
Amin Nasser, the CEO of Saudi Aramco, said Monday in a conference call that it would take “months for the market to rebalance” even if the strait reopens today.
Aramco, the world’s largest oil exporting company, warned that if the reopening is “delayed by a few more weeks, then normalization will last into 2027.”
Translation: Even in the best-case scenario, pre-war energy prices are not coming back anytime soon.
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