A spike in gas prices is one of the biggest risks to the stock market and economy
Aug 29, 2023, 3:54 PM EDT
- One of the biggest risks to the stock market and economy is a gasoline price shock, according to Carson Group’s Sonu Varghese.
- Gas prices are already up 23% year to date, and a further rise could reaccelerate inflation.
- Low US inventories of refined oil products could lead to elevated price volatility during hurricane season.
A potential gas price shock represents one of the biggest risks to the stock market and economy, according to Carson Group global macro strategist Sonu Varghese.
He highlighted in a Tuesday note that gasoline prices have already risen substantially so far this year, with the average retail price up 23% to $3.80 per gallon.
While that’s still well below the June 10, 2022 peak of $5.00 per gallon, further increases in gas prices could curtail consumer spending and reaccelerate the pace of inflation.
Prices at the gas pump are primarily driven by the price of crude oil, which makes up about 50% of the cost equation, according to the Energy Information Administration. But gas pump prices are also driven by the price differences between crude oil and refined products, known as “crack spreads.”
Crack spreads make up about 25% of the cost of a gallon of gas, while taxes, distribution, and marketing make up the remaining 25%.
What worries Varghese is the fact that crack spreads have surged over the past few months, similar to what they did in 2022 when gas prices hit records.
“Crack spreads usually rise when there’s not much inventory of refined product, i.e. low stocks of gasoline, diesel, and even jet fuel. This is due to various reasons, including refinery closures and lack of investment in capacity,” he explained.
With US petroleum inventories below 2015-2019 averages, that could leave the gasoline market vulnerable to a supply shock that would ultimately drive prices higher.
“This is what happened when Russia invaded Ukraine. We got another reminder of this last week, when a storage tank caught fire at an oil refinery in Louisiana, the third largest in the US,” Varghese said.
His big worry is that surging gas prices can have a negative knock-on effect on the broader economy. That’s because higher gas prices at the pump weigh heavily on consumer sentiment and can lead to curtailed spending.
Meanwhile, higher prices can drive a reacceleration of inflation as gas is a key input into many industries, including food delivery costs. Airplane fares are also highly sensitive to the price of fuel.
A reacceleration in inflation would likely lead the Federal Reserve to maintain its tight monetary policy stance and hike interest rates further.
Rising gas prices “immediately becomes a problem for two reasons in particular: It may force the Fed to react and raise rates again, and quickly, [and] it reduces households’ real income,” Varghese said. “We saw both play out last year. The economy was resilient enough to get through it, but I’d rather not see the economy battle through that again.”
While he remains bullish on the outlook for the stock market and economy, he does worry that another gasoline price shock could serve as a big headwind for investors and consumers.
Source: Markets Insider
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