The Price at the Pump
Telemus Weekly Market Review June 26th - June 30th, 2023
The car is loaded. The cooler is packet. As we set off for a July 4th holiday road trip, all that’s left is to fill up the gas tank. If you are like me, you continue to have sticker shock when you go to gas up. Sure, I’m happier paying $3.55 a gallon versus the $4.86 that I paid a year agoi. However, as someone who tracks the financial markets every day, I find that I’m more sensitive to the fact that gas prices just don’t seem to be falling as much as I’d hope.
The average gasoline price in the U.S., as measured by the AAA Retail Gas Price (Regular) index, has risen 11% thus far in 2023. That’s not all that bad when you consider at this time last year gas prices were up nearly 50% during the first half of 2022. However, what’s different in 2023 is that oil prices are down over 13% year-to-date. On top of that consumers are spending less on goods so freight traffic is down. Despite these undercurrents, we have yet to see an easing in prices at the pump.
A key factor that has helped to sustain elevated gasoline prices has been an increase in gasoline consumption over the past year. The higher demand comes at a time where refineries have had a greater amount of routine maintenance occurring, which has reduced the amount of gasoline produced. During 2022 many refineries elected to defer some maintenance to capture more volume given the elevated prices. As a result, refineries had to play catch up in 2023. Collectively these influences on both supply and demand have resulted in gasoline inventories currently sitting at the low end of their typical range.
Financial markets often look at the difference between gasoline prices and oil prices in what they term as the ‘crack spread’. Per the U.S. Energy Information Administration (EIA), as of early June the U.S. crack spread sat at $0.80 a gallonii, versus a normal spread of around $0.45. This dynamic means the average U.S. driver is paying $0.35 more per gallon than they normally might. That’s bad for consumers, but a short-term positive for refiners.
Looking forward, we should expect to see some increase in gasoline inventories. Refinery turnarounds are complete with the summer driving season in full force. This should help reduce the crack spread or narrow the price spread between crude oil and gasoline. However, as we have seen through a variety of economic reports, there is pent up demand for travel. Indications are that this may persist as consumers catch up on their travel agendas.
On behalf of all of us at Telemus Capital, we hope you have enjoyable and safe 4th of July and summer driving season.
iSource: https://gasprices.aaa.com/
iiEnergy Information Administration, Short-Term Economic Outlook, June 2023.
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Matt joined the Telemus team in 2018. As Chief Investment Officer, he leads the firms the investment process and research effort. Matt has experience as an equity analyst and portfolio manager and has advised corporate pension plans on their manager selection. He’s been quoted in Money Magazine and Barron’s.
