Consumers are being given some early festive gifts this season, and that’s the continuance of the freefall of gasoline and diesel prices.

In the last five weeks, gasoline pump prices alone have fallen close to 50 cents per litre!

But beware this freefall, because it may not be for long, and you may need to grab your parachute.

Why do you say this Mr. Grinch?

I say it because there should be an updraft on prices for the following reasons:

Generally speaking, the global supply of crude and refined products is tight. In the U.S., where all Canadian prices are linked, inventories of crude and all refined products on average are down 9% compared to the 5-year average. So, for the time being, demand is down for refined products.

The supply/demand picture should also change with the recently announced relaxing of COVID-19 lockdowns in China. This will create a sudden crude supply demand burst of 1 million barrels per day, which will then boost Brent crude prices, and then filter down to gasoline and diesel prices.

Next, the 900,000 barrel per day (bpd) draw from the Strategic Petroleum Reserve (SPR) will stop. The flow will have to be reversed and taking this volume out of the domestic commercial inventory reports will alarm traders and increase crude prices.

Then we have the European Union (EU) ban on Russian oil imports. The EU will have to scramble for alternate supply sources for 1 million bpd, which will come from the U.S. and others. With the U.S. stopping the SPR draw and now needing to export crude, this will add even more upward pressure on crude and refined product prices.

Finally, it is unclear how Russia will react to the $60/bbl cap placed on its crude price, and how this will complicate the footpath of the crude price trend. Two of the world’s largest crude oil importers, China and India are not in agreement with the cap agreed upon by the G-7 and will continue to import Russian crude – and probably at a huge discount. So, cash and crude will continue to flow to and from Russia. To cripple Putin’s finances, you need a lower cap but if you do that then all he has to do is cut back production and jack up global crude prices and then pump prices will follow suit.

This is not what President Biden needs right now with consumers caught in a tug of war between a recession and inflation.

The consumer is fearful that the recession will mean a reduction in available jobs, and even if there are jobs, they can barely afford the bloated prices on the shelf due to high interest rates and inflation.

Enjoy your sale priced fossil fuel gifts today because soon they’ll no longer be on sale.

– Roger McKnight – B.Sc., Senior Petroleum Analyst

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