Energy

Why oil and gasoline prices are rising faster than analysts expected this year

Key Points
  • The oil price rally has exceeded many analysts' expectations, driving up prices at gasoline pumps.
  • Oil demand is holding up better than suggested by a series of gloomy forecasts last fall, pushing up the cost of crude.
  • OPEC supply cuts and U.S. sanctions on Iran and Venezuela are leaving the market with less cushion to absorb oil supply disruptions.
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Oil prices are rising faster this year than many energy analysts expected, leaving many consumers to wonder how much further their gasoline bills will jump.

U.S. West Texas Intermediate crude oil prices have rallied 37 percent this year, hitting a five-month high near $63 a barrel on Wednesday. Brent crude, the international benchmark for oil prices, is up 28 percent and almost breached $70 a barrel for the first time since November.

The oil prices rally has contributed to seven straight weeks of higher U.S. gasoline prices. The national average for a gallon of regular gasoline is now sitting around $2.70.

"There's no fooling motorists, gas prices have continued to surge," said Patrick DeHaan, head of petroleum analysis for GasBuddy.com.

"The run-up this spring has felt worse than prior years, and thus far, the national average is up nearly 50 cents per gallon from our 2019 low. Unfortunately, this [is] a rut we'll be stuck in yet for at least a few more weeks," DeHaan said in an email briefing on Monday.

One reason oil prices have surprised analysts this year: Demand for crude has been stronger than gloomy forecasts suggested last fall. Those projections said growth in oil consumption would slow significantly, but the world's appetite is growing at a healthy pace so far this year.

"Everybody came into the year with a very negative view and actually demand has been resilient," Michele della Vigna, co-head of European equity research at Goldman Sachs said on Wednesday.

"Demand remains robust particularly in the emerging markets, which continue to buy a lot of crude," he told CNBC's "Squawk Box" in Europe.

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Oil demand has been resilient, Goldman Sachs says

On the supply side, OPEC and its allies are cutting production at the same time that U.S. sanctions are choking off crude exports from Iran and Venezuela.

Those policies have shrunk supply and left the market with less cushion to absorb unexpected supply disruptions — which have been plentiful in recent weeks. In the U.S. alone, disruptions have included flooding across the Midwest, refinery fires and a blaze at a Texas petrochemicals storage facility that disrupted traffic in the Houston ship channel.

"US Midwestern floods, unplanned outages, transit disruptions, and OPEC cuts have all snarled the supply side of the oil market, supporting prices," Barclays wrote in a recent research note.

Those prices are likely to move higher, with Brent averaging $73 a barrel this quarter, according to Michael Cohen, head of energy markets research at Barclays.

The key questions moving forward are whether the so-called OPEC+ alliance will extend its output cuts for another six months in June and how much the U.S. will tighten sanctions.

Saudi Energy Minister Khalid al-Falih has strongly signaled that he backs an extension. But Russia, which leads the non-OPEC members of the alliance, has refused to commit to another six months of output caps. The group will make a decision at its June meeting.

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IHS Markit: Oil prices are likely to be headed higher

By that time, the U.S. will have likely tightened sanctions on both Iran and Venezuela, giving OPEC+ a better reading on supply and demand.

Analysts generally think the Trump administration will allow several countries to continue buying Iranian crude when their special permissions expire in a month, preventing a spike in oil prices. But U.S. officials keep threatening to cut Iran's shipments to zero, raising concerns that hawks within the administration will convince President Donald Trump to strip China, India, and other importer nations of the sanctions waivers.

"We continue to view the cancellation of all waivers to be unlikely (a 15% probability), given the consequences to both the oil market and US bilateral relationships. But, to be clear, the cancellation of waivers is possible," risk consultancy Eurasia Group said in a research note on Tuesday.

Barring that sort of surprise, many analysts see oil prices trading in a narrow range, with Brent unlikely to top $75 a barrel for long.

Against that backdrop — and with seasonal gasoline demand on the rise — American drivers should still expect their fuel prices to rise another 3 cents to 5 cents this week, said Andrew Lipow, president of Lipow Oil Associates.

"Crude oil prices are rising and in turn gasoline prices will follow as the U.S. tightens sanctions on both Iran and Venezuela, taking supplies off the market — at the same time that OPEC and non-OPEC producers are more than happy to see prices rise to $70 Brent and higher," he said.

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