Gas Prices Shouldn't Be High, But Are. Here's Why

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Gas Prices Shouldn't Be High, But Are. Here's Why
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By Javier E. David | @TeflonGeek

Rumors about the demise of U.S. gasoline demand have been greatly exaggerated.

Until late 2013, most energy observers forecast the world's most reliably gas-guzzling market to consume less fuel this year. What was once thought to be a structural decline in demand, however, has proven more durable than expected.

As the summer driving season nears, retail gas remains stubbornly lodged near $4 a gallon. According to the Energy Information Administration, gas prices rose for 12 straight weeks through late April, and were 20 cents a gallon higher than the same point last year.

So what gives?

"The world's not swimming in crude or gasoline yet," said Francisco Blanch, commodities strategist at Bank of America-Merrill Lynch, in an interview. "Despite all the crude and gasoline production in the U.S., international markets are not tagging along."

%VIRTUAL-article-sponsoredlinks%International developments matter, analysts say, because gas prices are linked to internationally priced Brent crude. Turmoil in Ukraine and spotty supply from the perennially unstable Middle East has conspired to keep oil above $100 a barrel.

In a research note this week, analysts at Goldman Sachs (GS) called crude oil fundamentals "stable but tight," adding that most developed-economy stockpiles "remain at low levels" amid lower-than-expected output from hotspots like Libya and Iraq.

That backdrop explains why prices at the pump have defied the gravitational pull of a litany of mitigating factors such as a more fuel-efficient U.S. car fleet, rising domestic production and a still-fragile recovery that should blunt demand.

Bank of America-Merrill (BAC) points out that domestic oil and gas production has driven gasoline imports to near zero, while the U.S. is churning out nearly 10 million barrels a day. Despite all this, there has been little relief at the pump due largely to factors outside America's control.

The International Energy Agency said in its most recent report that OPEC will need to increase its own production this year to sate rising demand. Meanwhile, the energy watchdog said non-OPEC production is also falling short of expectations.

'Shale boom may not be helping'

"In the U.S. and Canada, yes, there is a big shale revolution going on ... but the rest of the world is not producing enough to feed itself," said Bank of America's Blanch. "That's why oil prices abroad are elevated and why gasoline, which is pegged to oil prices, are so high."

The EIA expects crude oil prices to fall this year, which should keep a lid on gas prices. Still, the agency expects average gas prices to rise by 3 cents during the June -- August period compared with the same quarter last year.

The latter may come as another blow to consumers, many of whom are hard pressed to see material benefits in the U.S. shale surge when retail energy costs are still so high.

"For now, the shale boom may not be helping consumers directly by pushing [gas] prices lower," said Blanch. Still, the oil and gas renaissance can alleviate energy inflation while creating economic benefits, like more jobs, he added.

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Gas Prices Shouldn't Be High, But Are. Here's Why
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