Gary B. from Las Vegas, NV asks: Hello Mitch, my question is about rising prices for oil and gas over the last few weeks. I’m curious to know what’s causing the price spike, and also if you expect prices to stay high for the rest of the summer and beyond?
Mitch’s Response:
Great questions, Gary. Let’s start with increasing oil prices, as I note below in the chart of West Texas Intermediate (WTI) crude oil prices. As seen on the far right of the chart, prices have jumped over the last few weeks – increasing over 15% in the month of July alone.1
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The reason I pulled up the 10-year chart, however, was to remind investors of how volatile oil prices can be over time. There was a stretch in the mid-2010s when oil traded over $100 a barrel, which arguably provided incentives for the fracking boom that saw a new flood of supply and plummeting prices. The oil markets are fungible, and respond relatively quickly to discrepancies between supply and demand.
In the current environment, there’s a good argument that rising oil prices are tied to Saudi production cuts, an improving outlook for the U.S. economy that may not involve a recession, and ongoing supply snags being caused by Russia’s invasion of Ukraine. Gas prices tend to follow oil prices, which helps explain why we’re now seeing higher prices at the pump.
But there are other factors that can impact gasoline prices but are unrelated to oil prices. Two of them are heat waves and futures traders.
On the first point, hot temperatures can increase costs for refineries. In order to refine crude into different products like gasoline, part of the process involves cooling. When the air used to cool products is hotter, it can make the fuel-making process more difficult and less efficient, which raises costs. That’s why refineries tend to pare back summer fuel runs, which in the case of 2023, has been even more significant.
As for futures traders, many are taking the hotter temperatures as a sign that hurricane season could be particularly challenging, which could mean refineries could be shut down for weeks or months and supply reserves could dwindle quickly, putting even more upward pressure on prices.
This brings me to the second part of your question regarding whether prices might remain high for the rest of summer or beyond. In my view, the answer is all about the supply side of the equation, and whether refineries do indeed suffer production setbacks in the late summer and fall due to hurricane season.
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Disclosure
2 Fred Economic Data. August 9, 2023. https://fred.stlouisfed.org/series/DCOILWTICO#
3 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.
4 ZIM may amend or rescind the guide “Helping You Manage Market Volatility” for any reason and at ZIM’s discretion.
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