The US Energy Information Administration this week issued its latest Short-Term Energy Outlook, raising its forecast for summer (Q3) gasoline prices upwardby 8.1% and expecting regular grade to average $2.91/gal.
US sources Thursday said that they were unsurprised by this new outlook for summer fuel prices, given the geopolitical risks identified in the EIA forecast.
The previous Short Term Energy Outlook from the US Energy Information Administration was released at the start of April and forecast that Q3 regular gasoline prices -- including taxes -- would average $2.70/gal.
Interestingly, summer fuel prices are now expected to be higher despite a seemingly more bearish supply-demand outlook. The EIA now forecasts that US gasoline consumption will average 9.56 million b/d in Q3, down 0.5% from the prior forecast. At the same time, US gasoline stocks are expected to average 228.4 million barrels in Q3, which is about 2% above the last supply forecast.
Amid slackening demand and expanded supplies, the new forecast for transport fuel prices chiefly reflects expectations of stronger crude oil values. The EIA now says Brent crude oil prices will average $71/b in 2018, $7/b higher than last month's forecast.
The EIA says crude oil prices are on an upward trajectory for three primary reasons: declining global inventories, signals pointing to strong economic growth around the world, and heightened awareness of geopolitical risk, particularly from Iran and Venezuela.
One US market source, a US Gulf Coast gasoline trader, said the new forecast for stronger Q3 gasoline prices "makes sense based on where crude prices are now." He added that, of the three factors identified by the EIA, geopolitical risk is probably doing the most to support crude prices. He said that geopolitical risks are difficult to quantify, which makes them "the biggest concern right now."
A second US market source, a refined products broker active in the Midwest and USGC cash markets, said he believes that a combination of "the [world] economy doing really well now right now" and the geopolitical risks associated with Iran offer the best explanation for higher crude oil values, and by extension stronger fuel prices over the summer.
"Everything considered, I think I'd have been surprised if [the EIA] didn't" raise the forecast for gasoline prices in May, he said.
Economist Philip Verleger said the higher forecast for 2018 crude and gasoline prices also made sense to him.
"In fact, I think there is plenty of room to see those gasoline prices climb even higher in the summer," Verleger said.
Between Iran and Venezuela, the latter poses a much greater risk for higher crude oil prices this year, he added.
"Data drives crude markets, not expectations," Verleger said. "Iran has not actually had to cut back any production yet. Venezuela is the real story here. Their output has been declining all year."
The latest STEO was published on May 8 and after its release, President Donald Trump announced he would withdraw the US from the Joint Comprehensive Plan of Action with Iran. The EIA says this news and resulting price movements were not reflected in the forecast issued May 8 but will be considered for the next forecast to be issued in June.
