Complexity clouds market as gas prices fall

key ideas

  • Hurricane Harvey destroyed 20% of US oil production.
  • Gas prices fell below $4 a gallon.
  • The complex oil market is full of variables, which makes it volatile.

After months of rising gasoline prices, the average US price per gallon has fallen below $4. Two important factors are contributing to the decline. First, demand is down, and second, the United States has released oil from its emergency reserves. According to NPR, “analysts expect prices to continue falling in the near term, but things get much more complicated later.” Tim Snyder agrees. He sees the complicated picture includes upcoming concerns about tropical weather, as late August and early September typically bring hurricanes. The ongoing war in Ukraine has impacted several pipelines, including the larger Druzhba pipeline. Inflation is always a major concern for Americans; now there are signs that it is also a concern for the rest of the world.

“Individually, we don’t expect them to materialize into something that will change the price direction of our energy complex, but collectively the impact could be quite traumatic,” Snyder said. It is difficult to find the point of balance between supply and demand. “There is chaos in the markets. Any market system, especially in the world’s first market, aspires to stability,” Snyder said.

Time

Hurricane season is upon us. In recent years, we’ve seen a massive spike in gas prices after storms slowed and stalled production in the Gulf. “A hurricane in the Gulf of Mexico could push prices up by 25 and 50 cents a gallon,” Tom Kloza, global head of energy analytics at Opis, said in an interview with Yahoo Finance. Hurricane Harvey destroyed 20% of oil production. Since the United States recently reclaimed its place as the largest oil producer in the United States, the world will be watching the radar closely. As we progress through August, we see more tropical activity in the second half of the month; in September there is a risk of disruption.

Energy independence

As the war in Ukraine rages on, Russia is taking advantage of its pipelines in response to sanctions. Volatility is unpredictable, ranging from reduced throughput in pipelines to 20% of capacity to complete shutdown. According to the Council on Foreign Relations, energy independence would help solve these problems. Dependence on foreign oil leaves the US and Western European markets subject to outside influences. Some leaders have called for independence, while others, like our current president, have promised to cut production and emissions in the United States. Additionally, “ESG policies are taking over financial markets in the energy complex, making production increases very difficult to develop even with huge quantities to supply,” Snyder said.

Market forecasts are everywhere. Groups like OPEC predict a surplus, while Goldman Sachs predicts a deficit. “A well-functioning market makes it easier for market makers to discover that price-clearing price,” Snyder said. The complexity of the current market is unfavorable to the United States. “Well-functioning markets typically have fewer layers of risk and more seasonal patterns to bring prices into more normal, predictable patterns,” Snyder said.

Sharon D. Cole