Gasoline prices traditionally peak during the Memorial Day weekend, which marks the start of the summer driving season. This year, a variety of factors are likely to propel pump prices to their highest level in six years.
“With 17 states within a dime of or already at $3 per gallon or more, Americans can expect the national average to likely surpass 2018’s high of $2.97 set during Memorial Day weekend.”
As of April 29, the national average gasoline price calculated by the U.S. Energy Information Administration set a new 2019 high of $2.97 per gallon. This is a five-cent jump on the week, 20 cents more than a month ago, and 64 cents higher than the beginning of the year. The American Automobile Association added, “With 17 states within a dime of or already at $3 per gallon or more, Americans can expect the national average to likely surpass 2018’s high of $2.97 set during Memorial Day weekend.”
A long-term driver of the rise in price has been the coordinated output cuts of the OPEC cartel and its OPEC+ petrostate allies like Russia. In March, OPEC’s output fell by 534,000 barrels per day to just over 30 million barrels per day in total—the cartel’s lowest production in four years. Leading the way on these cuts has been Saudi Arabia, which reduced its output by 324,000 barrels per day in March alone.
Falling OPEC production has been the key driver of oil’s price rise throughout 2019. In the first two months of the year, prices increased by 25 percent as OPEC curbed output—oil’s best-ever start to a year. U.S. benchmark West Texas Intermediate (WTI) has risen 36 percent in 2019, from $46.54 per barrel at the start of the year to $63.50 as of April 29. Similarly, Brent crude has risen 31 percent from $54.91 per barrel at the beginning of 2019 to $72.04 per barrel.
A confluence of political factors has further catalyzed this rise in price. Collapsing Venezuelan production has been exacerbated by U.S. sanctions on Venezuelan crude oil exports. This has forced Gulf Coast refiners to look elsewhere for the heavy oil they typically use as feedstock. Some refineries have turned to domestic sour crude grades to mitigate the impact of the sanctions, pushing prices up as alternatives from Mexico and Canada in particular struggle amid slowing production and transport bottlenecks.
The Trump administration’s decision not to reissue Iranian crude oil sanctions waivers has nudged prices up further: prices of WTI jumped to a 2019 high of $65.50 per barrel and Brent rose 3.3 percent to $74.31 after the news last week. The effect of these new Iran sanctions might not yet even be fully realized. If fully enacted, taking Iran’s oil off the world market will drive up competition globally for the heavier grades of crude preferred by U.S. Gulf Coast refiners and push prices higher in the process. The looming International Maritime Organization (IMO) 2020 shipping fuel rule is further complicating matters. Wood Mackenzie predicts the change will increase demand for oil by 700,000 barrels per day. The IMO’s rule mandates ships reduce fuel lower sulfur content starting in January, 2020.
Oil prices are also supported by robust demand growth. According to the EIA’s latest Short Term Energy Outlook, global oil demand will grow on average approximately 1.4 million barrels per day over 2019. Goldman Sachs attributes this strong growth to a diverse array of factors such as a move away from diesel in Europe, tax cuts in South Korea and continuing strong GDP growth in in the United States and China.
As oil prices slumped at the end of 2018, few industry watchers were willing to say crude would bounce back so strongly this year. Yet thanks to a variety of political factors—and OPEC’s ongoing cuts—oil prices are rebounding and gas prices continue to rise.