Gasoline Prices Will Get Worse Before They Get Better

If you’re disappointed about rising gasoline prices, I have some bad news – it could get worse before it gets better. Crude oil inventory levels are running below their 5-year average, well below last year, and continuing to decline amid increasing demand. The trend is especially worrisome since on a seasonal basis, inventories were plenty at the beginning of the year and well above long-term averages. But as economic reopenings accelerated and people started venturing out again, inventories plummeted.

Unfortunately, production isn’t ramping up as quickly as needed to keep a lid on gasoline prices. In fact, demand is back up to levels reached in 2019 but this time, crude oil total production is much lower. The number of oil rigs in production has increased but remains well below peak levels – and although OPEC can increase production rather quickly, they have an interest in higher prices. That means higher gasoline prices for consumers.

In fact, Arbor Research suggests that the fair value of WTI Crude is $97, compared to the current price of $70. That’s the highest level it would reach since 2012-2013. If history repeats, we should expect gas prices to rise to anywhere between $3.50-$3.75.

It’s part of the reason why energy shares have recovered to their pre-pandemic levels and for awhile the stocks in the energy sector were the best performers. But with further upside in prices expected, they may have additional room to go. The best performing industries within energy have been the exploration and production companies and pipelines and we expect this trend to continue. To play it safe, you might also consider some of the integrated oil companies that pay a decent dividend.