With gasoline prices on a quickening march, we may see $5 a gallon prices sometime this year. However, the current pricing is contingent on Iran’s nuclear status, and gas prices, along with a related exchange traded fund that follows gasoline price movements, could quickly drop if the risk premium is taken out.
U.S. Commodity Gasoline Fund (NYSEArca: UGA) is up 18.3% year-to-date.
The national average cost of gas hit $3.69 on Feb 24, up 18 cents a gallon in two weeks, as tensions in the Middle East escalate, reports Ransdell Pierson for Reuters. [Gasoline ETF Surge Reflects Pain at the Pump]
“Fears about a possible hit to oil supplies from the Middle East are causing turmoil and confusion,” Trilby Lundberg, editor of the nationwide Lundberg Survey, said in the article. “”If these (Mideast) fears become more fervent, on either a real or a perceived basis, then crude oil prices could jump again.”
According to 24/7 Wall St., there are eight predominant reasons why gas can inch up to $5 a gallon this year:
- Strait of Hormuz. Around 20% of global crude oil is shipped through this narrow strait, and Iran – the nuclear powered country that has threatened to close it off – is in control of the sea lane.
- The World and Iran. The U.N. is pressuring large oil importers to eschew Iranian oil, which is putting greater pressure on the tight global oil supply.
- Refiners. Oil refiners on the east coast use Brent crude from the North Sea, and Brent is trading around $124 a barrel, or about a $15 premium over WTI crude. However, some refiners are still using the WTI benchmark. Once they make the switch over, refineries originally tied to WTI will incur loses, and they will likely increase gas prices to cover the initial loses.
- Geopolitical Risks. In Nigeria, the 14th largest oil producer, Islamic terrorists are attacking pipelines to disrupt the government. Venezuela, the 11th largest producer, could face a political uprising if Hugo Chavez, who is due for a second cancer surgery, loses his grip. Other areas of he Middle East and Africa are also seeing threats in their oil supply.
- The E.U. The Eurozone is facing a recession. According to the European Commission, the Euro bloc will contract 0.3% due to deep recessions in several E.U. states, especially in Spain and Portugal.
- The U.S. On the other hand, the U.S. economy is humming along. The greater demand for oil will translate to higher oil prices.
- Summer Time. The time honored tradition of traveling during summer has also attributed to historically higher gasoline prices during the summer months, although the boost has been relatively smaller in the past three years.
- Supply. OPEC members diminished their spare capacity capability from 3.18 million barrels per day to 2.85 million in December.
However, Phil Flynn, oil analyst at PFG Best, contends that “We’re probably not going to hit $5 a gallon,” reports Jeff Macke for Yahoo! Finance. He argues that the current pricing revolves around Iran.
Iran is “the biggest risk premium in the price of oil since 2008,” Flynn said. “If the worst case scenario doesn’t happen we’re going to have a bunch of oil sitting around in tankers that will put significant downward pressure on prices.”