Why $5 Gasoline Won’t Cause A Recession

After three straight days of gains, crude prices fell on Wednesday and have continued to slide on Thursday's intraday session after a report showing an uncharacteristic slowdown in gasoline demand outweighed a bullish crude inventory report. According to the report by the U.S. Energy Information Administration, the four-week moving average of gasoline supplied--considered the best gauge for demand--fell below 9 million barrels a day, which works out to ~600,000 barrels less than typical seasonal levels. Middle distillate production averaged 5.1 million barrels daily last week, a decline on the week to June 17.

"The market is stuck in the push-pull between the current deteriorating macro backdrop and the looming threat of a recession, pitted against the strongest fundamental oil market set-up in decades, maybe ever," RBC Capital's Mike Tran has told CNBC.

Falling gasoline demand is a sign that high fuel prices - which hit an all-time high of $5.016 a gallon on June 13 - are making summer road trips less attractive and also compounding decades-high inflation rates.

It's also a sign that oil prices might have reached a point where they begin to cause demand destruction.

Fortunately, high oil prices are unlikely to plunge the economy into a recession.

Source: Bloomberg

Consumers Are In Better Shape

That is a view shared by a cross-section of analysts who have argued that the U.S. consumer is in much better shape this time around compared to periods during past recessions.

"Savings were pretty good coming out of the pandemic. I think people were in a better position to weather those higher gas prices right now. Together with this pent-up demand for travel, it's shielding us from this $5 gas price," Harrison Fell, senior research scholar at Columbia University's Center on Global Energy Policy, has told CNBC.

AllianceBernstein says that  an energy price crunch is unlikely to lead people to a drastic decline in spending because "...household balance sheets are stronger than they've been in years, with high employment, rising wages and plenty of spare cash accumulated during the pandemic."

That said, despite the latest data showing a drop in gasoline demand, where that breaking point price lies remains unclear. 

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Mark Zandi, chief economist at Moody's Analytics, has told CNBC that $6 per gallon would be the tipping point.

"I don't think we're there yet. If we get to $5.50 or $6, that would be consistent with $150 for a barrel of oil. I think then, we're done. We're in for a recession. It would be too much to bear. I think we could digest $120 if we don't stay there too long," he said.

Other experts have suggested that high gas prices alone would not be enough to send the economy into a tailspin. 

Sarah House, senior economist at Wells Fargo, has estimated that gasoline will average $4.84 per gallon for the month of June. To make that equal to 2008 levels, based on a wage-adjusted basis, prices would have to hit $6.41 per gallon.

"It's going to take more than just higher gasoline prices to knock the economy into a recession. We're slowing, but it's still a remarkable number of jobs we're putting up," she said.

JPMorgan analysts expect gasoline could top out at a price of $6.20 per gallon by August, but other analysts expect the peak price to stay closer to $5.25 per gallon because drivers will likely cut back.

Another big difference: vehicles are more fuel-efficient, and there are more hybrid and electric vehicles on the road compared to 2008. There's also more flexibility in commuting, with more people opting to work remotely, either full-time or on a part-time basis.

In short, it's too early to conclude that oil prices have reached a point where they are likely to depress the economy to the point of pushing it into a recession.

Indeed, the latest crude trends suggest that demand remains strong.

After reporting its biggest oil inventory build since February for the week to June 17 at 5.6 million barrels, demand for crude has rebounded, with data by the American Petroleum Institute showing an inventory draw of 3.8 million barrels for the week to June 24.

That said, economists are watching consumer trends closely for behavioral changes. One notable trend has been an increase in credit card use, with consumers taking on more debt. 

By Alex Kimani for Oilprice.com

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