Gasoline prices aren't dropping anytime soon

It wasn't meant to go this way. When President Joe Biden announced the release of oil from the US Strategic Petroleum Reserve in November, his intention was to bring down the cost of gasoline for American motorists. It hasn't worked, and now he has few, if any, good options.

Three months ago, the US administration was pressing the OPEC+ group of oil producers to open their taps more quickly in an attempt to combat rising gasoline prices and spiraling inflation. They refused and the president responded by announcing the release of 50 million barrels of crude from government-controlled stockpiles in salt caverns beneath Texas and Louisiana.

A handful of other nations — including Japan, South Korea and India — joined him, announcing much more modest releases of their own.

At the time, US average gasoline prices had just broken above $3.42 a gallon, reaching their highest level since September 2014. But Biden's plan seemed to work — even if the correction was only very modest. By the end of the year, prices were below $3.29 a gallon, a drop of 4%.

But on Thursday, just 34 days into the new year, they were back above that early-November level, setting a new post-2014 high.

The easing of gasoline prices should have continued, driven by a fall in the price of crude as supply began to exceed demand — at least, that's what the forecasters were saying. All the major agencies were showing global oil balances shifting from shortage to surplus in the first quarter of 2022. The oil producers were even more extreme, with Saudi Arabian energy minister Prince Abdulaziz bin Salman saying that stockpiles would begin to build again from December. 

There's no sign of that happening. As I've noted, the International Energy Agency is starting to worry again about a tighter-than-expected market due to "missing barrels." The concern is that the oil isn't "missing" at all, but in fact has already been burned because of demand running higher than estimated.

We may indeed be heading for a period of oversupply later this year, but there is no sign that we are there yet. And that may not even bring down oil prices much.

The forecasts of supply running ahead of demand rely on a slowdown in the post-pandemic recovery and continued growth in the amount of oil being pumped out of the ground.

As we get closer to pre-pandemic demand levels one might reasonably expect demand to slow, but there's little sign of it going into reverse. With most of the populations of Europe, North America and Asia held under some form of movement restrictions for much of the past two years, there is a strong pent-up demand for travel, whether for leisure or business. That's likely to keep propelling oil use.

On the other side of the balance, the OPEC+ oil producers are struggling to keep pace with their own agreed output increases to supply more oil.

Last week, they ratified their policy to add another 400,000 barrels a day to supplies in March, following similar additions each month since August. The problem is, they aren't pumping anywhere near as much as their targets suggest. The latest data from the group shows that in December they were collectively pumping almost 800,000 barrels a day below their target. That hasn't changed much in the past six months.

Even if the producers do find a way of getting closer to their output target — the most obvious one would be for those with the ability to pump more making up for the inability of others — that raises its own problems. With most OPEC+ members already pumping almost as much as they can, the cushion of spare capacity is shrinking. Current forecasts suggest it could fall to as low as 2 million barrels a day later this year — that's the smallest buffer the world will have had in percentage terms since the invasion of Iraq in 2003.

With demand likely to be higher and supply lower than forecasts suggest, it's little wonder that oil prices — whether for crude or for fuel at the forecourt — are soaring. And that's before you add in any of the geopolitical worries around Russia's intentions toward Ukraine, recent unrest in Libya or drone attacks on the United Arab Emirates and Saudi Arabia.

President Biden may have to wait a while for gasoline prices to come down — as will the rest of us.

Julian Lee is an oil strategist for Bloomberg First Word. Previously he worked as a senior analyst at the Centre for Global Energy Studies.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.