Gas prices: Consumers could be in for a 'crude awakening' amid supply challenges, analyst says

GasBuddy Head of Petroleum Analysis Patrick De Haan joins Yahoo Finance Live to analyze how declining gas prices may further pressure energy supply and demand conditions and expected American trends ahead of the summer travel season.

Video transcript

- Heading into Memorial Day weekend, drivers are getting some long awaited relief at the pump. The national average now sitting at $3.53 a gallon. That's according to AAA. That's down about $1 from this time last year. Joining us now is Patrick De Haan, GasBuddy head of petroleum analysis. So take us through what we can expect as we're heading into the summer travel season.

PATRICK DE HAAN: Well, continued relief, barring unexpected outages at refineries or major hurricanes. The national average price of gasoline likely to be over $1 a gallon lower for much of the summer compared to last year. In fact, according to our numbersm we just hit that level. We fell to $1 a gallon deficit from a year ago. That's only the fourth time in history that we've seen such a dramatic drop in year-ago prices compared to a year ago.

And so consumers are going to be the bulk beneficiaries. Americans today spending $302, $80 million less on gasoline than a year ago, certainly good news. And the good news doesn't stop there. The price of diesel also dropping. In fact, now it's at its lowest level since March of 2022. Both gasoline and diesel prices likely to remain pretty low this summer compared to where they were last year.

- What about the willingness to shell out the money? I mean, we realize that there's been some relief at least in gas prices, but to what extent are you finding that consumers are willing to pay in this tough environment, in terms of taking road trips? I mean, how does the demand likely to compare to where things were last year?

PATRICK DE HAAN: Well. ironically, I think demand could weaken this summer compared to last year, even in the light of gas prices that could be 25% to 35% lower. And I think a lot of that has to do with anxiety over the economic situation, a potential recession, the Federal Reserve raising interest rates. A lot of the stories people are watching doesn't really make them feel terrific on going out and hitting the road this summer.

So by and large, demand has been a little bit of a laggard this year compared to last year. And that's a trend that could continue through the summer driving season. So don't expect as many Americans to hit the road, given some of those economic headwinds, even with lower gas prices.

- Yeah, and there are signs here that there could be potential headwinds or more headwinds moving forward. We heard from the IEA today talking about what demand is likely to look like moving into the second half of the year. Specifically on oil, they said that demand is likely to eclipse supply by 2 million barrels a day because of the stronger-than-expected demand coming out of China as they continue their reopening. What does that mean broadly in terms of gas prices, and how significant is the risk to the upside?

PATRICK DE HAAN: Well, that certainly could be something to watch for the second half of the summer. I think the market is overly pessimistic right now. Inventories are not terrific when compared to a year ago. Distillate inventories are only 2% above a year ago.

I think the big difference right now is the overall sense of sentiment is rather low across the United States. So if we do start to see growth coming in the United States, and especially in China, we could be in for a crude awakening, as oil prices could stand to rally again in the second half of the summer, depending on those economic headwinds. If they lighten up, we certainly could be in a bit of trouble as inventories globally still remain tight, especially with OPEC's ongoing production cuts.

- OK, Patrick, I hear you, and I like the little pun there, crude awakening. But what I find interesting is I've seen some data saying that there's an expectation that more people will be flying versus hitting the road. But more often, at least anecdotally, I hear is people still, if they're going to cut cost, they're going to cut it on flying and they will hit the road. People really do like their summer travel. Do we really think that there is going to be that much of a cutback this summer compared to last summer?

PATRICK DE HAAN: I wouldn't say it would be significant. We're probably talking the low-- the low single digits, maybe a 2% to 5% drop. But as you mentioned, I think conditions have improved to jump on a plane. More airlines have added capacity in the form of additional planes. So there is more capacity. And the price of jet fuel is down. So airlines are getting a little bit more competitive because of those additional seats.

So, you know, Americans may be more able to jump on a jet, given the potentially falling price of fares this summer. But again, I think gasoline demand is going to be a little bit off of its peak a year ago, and a lot of that still has to do with anxiety over which way the economy is heading and continued layoffs, even though jobs numbers do look pretty good.

- Let me get back to what you said, Patrick, about the demand picture when you look at things globally, not specifically just in the US, when you say that we could see higher prices going into the second half of the year. I mean, what's the expectation consumers should have?

PATRICK DE HAAN: Well, I think right now, it's very tough to pin those-- pin a forecast down of where we're going to be in the second half of the summer, because I don't think anyone really knows when the Fed is going to hit pause permanently and how quickly any rate decreases could come. I think that could be a catalyst for an increase in demand. If suddenly that sentiment shifts from pessimism to optimism, very quickly we could see oil prices rally.

But that's the biggest, the million dollar question is, will the Fed act as a catalyst by cutting rates too early? A lot of the Fed chairman and regionally at the banks across the country are suggesting that we probably won't see cuts yet. So I think consumers should be a little bit wary about potentially hitting the road in the second half of the summer, given the wide range of potentials. But I think the odds based on the Fed are still against that rally happening in 2023.

- Patrick, so the Biden administration earlier this week, literally yesterday, announced plans to tap the SPR, the Strategic Petroleum Reserve. What does that signal to you with regard to fuel and what will happen with the sector and with gas prices?

PATRICK DE HAAN: Well, the front-month contract for WTI is still back around $70 a barrel, and there's a lot of contracts well beyond that stretch below $70 a barrel. So the government looks poised to potentially start refilling because its strike price is here now and into the months down the road, especially when demand is likely to weaken later this fall and winter. So I think the government is well advised to start refilling the SPR, especially in the geopolitical climate we're in. And this is not a bad window to start getting those things in order to refill the SPR.

I don't necessarily expect that $3 million purchase to be successful yet. Keep in mind the government is going from a market price option to a fixed price. There may be some complexities, but I do expect that in a matter of time, the government will start to refill the SPR, given the value of the SPR and given the value of having an insurance policy against countries like Saudi Arabia and Russia.

- GasBuddy's Patrick De Haan, always good to have you on the show. Really appreciate the time today.