Complexity Clouds the Market as Gas Prices Decrease

Key Insights

• Hurricane Harvey knocked out 20% of US oil production.
• Gas prices have fallen below $4 a gallon.
• The complex oil market is full of variables, making it volatile.

After months of rising gas prices, the US average price for a gallon fell below $4. Two significant factors are contributing to the decrease. First, demand is down, and second, the US released some oil from its emergency reserves. According to NPR, “analysts expect prices will continue to fall in the short term, but things get a lot more complicated further out.” Tim Snyder agrees. He sees the complicated picture to include 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 largest pipeline Druzhba. Inflation is still a significant concern for Americans; now, signs show it’s 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 for our energy complex, but collectively the impact could be quite traumatic,” said Snyder. It’s challenging to find the balance point between supply and demand. “There exists chaos in the markets. Any market system, especially in the leading market in the world, craves stability,” said Snyder.

Weather

Hurricane season is upon us. In recent years we saw a massive spike in gas prices after storms slowed and stalled production in the Gulf. “A hurricane in the Gulf of Mexico could bring prices up in increments of 25 and 50 cents a gallon,” said Tom Kloza, Opis Global Head of Energy Analysis, in a Yahoo Finance interview. Hurricane Harvey knocked out 20% of oil production. Since the US recently reclaimed its spot as the biggest producer of oil in the US, the world will be keeping a close eye on the radar. As we progress through August, we see more tropical activity through the later half of the month; into September, there’s a risk of disruption.

Energy Independence

As the war in Ukraine rages on, Russia has been leveraging its pipelines in reaction to sanctions. The volatility is unpredictable, from decreasing flow in the pipelines to 20% of capacity to stalling out completely. According to the Council on Foreign Relations, energy independence would help subside these issues. Dependence on foreign oil leaves the US and Western European markets prone to outside influence. Some leaders have urged independence, while others, like our current sitting president, have promised to decrease production and emissions in the US. Additionally, “ESG policies taking hold of financial markets in the energy complex, making production increases very difficult to develop even with huge amounts to supply,” said Snyder.

Market predictions are all over the place. Groups like OPEC predict a surplus, while Goldman Sachs predicts a deficit. “A smooth running market makes it easier for market makers to discover that price equilibrium price point,” said Snyder. The complexity of the current market is unfavorable for the US. “Smooth running markets usually have fewer risk layers and more seasonal patterns to drive prices to more normal and predictable patterns,” said Snyder.