Oil Prices are down, prices at pumps aren’t!

By: |
August 19, 2018 1:01 PM

It’s not just a looming global trade war. As I’ve written, not only will tariffs and retaliatory measures stifle the activity that normally stokes consumption, they’ll squeeze economies everywhere. That’s a good way to stifle demand.

Oil Prices are down, prices at pumps aren’t!

It’s not just a looming global trade war. As I’ve written, not only will tariffs and retaliatory measures stifle the activity that normally stokes consumption, they’ll squeeze economies everywhere. That’s a good way to stifle demand.

But that’s not the only problem the market faces.

Recovering oil prices and weaker emerging-market currencies have combined to hit consumers’ pockets. The result could be a significant slowdown in the very countries expected to be the powerhouses of global growth. And this adds up to another reason for thinking growth in demand for oil is set to cool.

Although dollar-denominated crude prices are currently around 40 percent below their level just before the 2014 price crash, the same is not true of retail gasoline or diesel prices, not even in the U.S.

American average premium gasoline prices peaked in June 2014 at a little over $4 a gallon before sliding below $2.50 in early 2015 and as low as $2.20 a year later. But since then they have staged a steady recovery, coming within a whisker of $3.50 in the run-up to this summer’s driving season.

That was enough to prompt angry tweets from President Donald Trump and promises from Saudi Arabia and its allies in OPEC, as well as from Russia, to boost oil supply. And though crude prices reacted sharply, gas prices eased only a little, remaining around $3.40 a gallon through the height of the driving season.

The highest summer gas prices in four years have hit demand, and the picture has shifted from one of strong growth in the first three months of the year to a much more ambiguous picture in the second and third quarters. The more-accurate, though less-timely monthly numbers from the Department of Energy bolster this view.

Stubbornly high gas prices have darkened the outlook for U.S. demand.

Elsewhere, the headwinds are even stronger. Here, the strengthening greenback has made oil more expensive when converted into local currencies. The knock-on effect on pump prices has been dramatic.

In China, motorists never saw the full benefit of lower crude prices passing through to the pump. Though the international market dropped by more than 70 percent from mid-2014 to 2016, retail gasoline prices in Beijing fell by about a quarter. And while crude is still down around 35 percent from pre-crash levels, gasoline prices are back close to where they were at that time.

The International Energy Agency says China’s gasoline consumption in the second quarter dropped by 200,000 barrels a day, or around 7 percent, compared with the same period last year. Demand could continue to shrink, with rising sales of alternative-fuel vehicles and the growing popularity of bike-sharing arrangements for short-distance travel both denting demand for gasoline, according to Bloomberg Intelligence.

In India, drivers have been hit even harder. Here, retail gasoline prices are around 8 percent higher than they were in June 2014. Rising vehicle sales and steady economic growth are helping to underpin Indian gasoline demand, according to OPEC.

But the IEA notes that year-on-year growth rates in 2018 have been flattered by comparisons with weakness in 2017, which resulted from demonetization and the introduction of a new tax. The agency already sees growth slowing next year. That doesn’t bode well for global demand, given that India has overtaken China as the world’s fastest-growing oil market.

The market has plenty of support on the supply side, from renewed sanctions on Iran to the continuing slide in Venezuelan production, uncertain stability in Libya, and an erosion of the world’s spare production capacity.

With all these factors coming alongside solid growth in consumption, oil prices would be pretty well underpinned. But cracks in demand are starting to appear.

Get live Stock Prices from BSE, NSE, US Market and latest NAV, portfolio of Mutual Funds, Check out latest IPO News, Best Performing IPOs, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Financial Express is now on Telegram. Click here to join our channel and stay updated with the latest Biz news and updates.

Next Stories
1Petrol, diesel price hiked again; diesel nears Rs 100-mark in Goa, Bengaluru
2Petrol, diesel prices rally to highest ever levels
3Gold breaks above resistance, looks bullish now, silver must breach 63500 to rally; how to trade next week