Spiking gas prices could ding consumer recovery

By Andrea Tse

Gasoline prices could spike high enough this summer to significantly rattle consumer confidence and further depress an already sluggish U.S. home sales market.

One major driver behind gasoline prices will be Iran, which threatens to retaliate against Western embargoes of its oil imports by closing the Strait of Hormuz, which allows for the passage of as much as 20 million barrels of crude a day on tankers. There is a roughly 96% positive correlation between gasoline and crude oil prices.

"Even the belief that there is a realistic chance that Iran could attempt to do so could send crude prices, and very quickly thereafter gasoline prices, spiraling upward," says Neal Walters, a partner in A.T. Kearney's energy practice.

Diane Swonk, Mesirow Financial's chief economist, says retail gasoline prices at around $3.45 a gallon represent a tipping point where drivers curb their gasoline consumption and consumers make more trade-offs in their budgets. An event like the Iranian closure of a key waterway for transporting oil could send gasoline prices soaring above that mark and seriously tip the scales against the recovery in U.S. consumer confidence.

Related Articles

• Oil prices: Where will they finish in 2012?
• India's gold demand: Strong or gone?
• 10 top dividend stocks to own until retirement

Tim Evans, a Citi futures perspective energy analyst, says retail gasoline prices could breach the $4 spike reached in 2008 if Iran were to make any major moves of this nature.

Michael Feroli, JPMorgan's chief U.S. economist, said, "If gasoline were to rise to around $4 a gallon by April or May, then I believe . . . consumer spending would come in below trend, as disposable income gets squeezed."

The shuttering of various European and U.S. northeast refinery operations of late due to unfavorable margins and a difficult lending environment could also eventually lead to supply-constraint-dr​iven gasoline price spikes when demand starts to pick up again toward the summer peak driving season, analysts say.

"We should be aware that the import situation going forward is also going to take a big hit into this year," cautions Oil Outlooks and Opinions president Carl Larry. "Europe is fading fast, and that should give (refineries) more reasons to slow refinery runs and see their demand come off. We'll not be able to get relief on normal gasoline imports during summer."

European refiner Petroplus recently decided to shut operations at three of five of its refineries across Europe because of credit constraints. Meanwhile, U.S. northeast closures have or will be taking place at ConocoPhillips' (COP) 185,000 barrel-per-day Trainer, Pa., refinery and Sunoco's (SUN) Marcus Hook and Philadelphia refineries in Pennsylvania, which combined had roughly 500,000 barrels a day of refining capacity.

Gluskin Sheff chief economist David Rosenberg worries that gasoline prices have stopped declining and now warns of "much more tepid" consumer spending. The economist attributes December's improvement of consumer confidence to an eight-month high and retail sales surge of 4.7% year over year directly to a 70-cent slide in gasoline prices since late summer, which was enough to add $100 billion of cash flow into consumer pocketbooks. A spike in prices could, of course, have an equally negative effect.

Larry, of Oil Outlooks and Opinions, thinks retail gasoline prices could jump to $3.80 in summer from roughly $3.25 now. Meanwhile, looking at just the Northeast, Energy Security Analysis president Sarah Emerson predicts an average summer high of roughly $3.60. A summer spike would also be negative for the already fragile housing market.

"If gas prices peak in the spring or summer, that could hurt consumer confidence during the prime months for homebuying," says Trulia chief economist Jed Kolko. Home sales tend to be highest around June.

Kolko adds that high gasoline prices would especially dissuade homebuyers from purchasing in outer suburban areas, where commutes are longer. That, in turn, could hurt government plans to rent out foreclosed homes, as many of them are in outlying areas, the economist points out.

Rich Ilczyszyn, the chief market strategist and the founder of iiTRADER.com, expects retail gasoline prices to average $3.90 this year.

Barring any major event from Iran, Trey Cowan, Rigzone's senior market research analyst, expects retail gasoline prices to average $3.50 or less during 2012, which is roughly a 2% decline from the previous year's prices, because of weaker demand. Citi Futures Perspective's Evans would see retail prices closer to $3 than $4 when excluding Iran.

"If . . . gas prices come down to $3 a gallon, then I think once again you could see the consumer do better in the second half, much as occurred in 2011," says Feroli of JPMorgan.

Predictions of easing gasoline prices are also being driven by views that there could be oil supply overhang concerns coming up in the absence of a strong and immediate message by the successor of Saudi King Abdullah, reinforcing the adherence to self-imposed production limits by members of the Organization of the Petroleum Exporting Countries. "Abdullah will be 88 years old in 2012, and the question of Saudi succession will likely need to be clarified relatively soon," Walters, of A.T. Kearney, says of the top oil-exporting nation.

The offsetting of refinery shutdowns in the Northeast by, for instance, the expansion of Motiva Enterprises -- a joint venture between Shell (RDS.A) and Saudi Refining -- of its Port Arthur, Texas, refinery to 600,000 barrels a day may also help prevent supply-constraint-dr​iven gasoline prices spikes.

Meanwhile, Harry Tchilinguirian, BNP Paribas' head of commodity markets strategy, says lost European product output can be met by production by plants elsewhere in Europe. Other analysts say that during the summer, European imports may not make much of a difference on supply anyway, as their conventional blends do not match the Environmental Protection Agency's summer blend requirements for some of the high-demand areas of the U.S.

"A lot of people overreact, and they think this will be the year where there's not enough gasoline -- and you get these rallies," warns Tom Kloza, a chief oil analyst at the Oil Price Information Service.