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Gas prices: Consumers will ‘make different choices’ as summer travel ends, analyst says

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KPMG Global Head of Energy Regina Mayor assesses the outlook of global energy markets, oil demand, how gas prices are contributing to inflation, and how geopolitical pressures and travel demands are impacting energy prices.

Video Transcript

DAVE BRIGGS: BP the latest oil and gas company to report strong second quarter earnings results today. Meanwhile, the price of gas continues to come back down to Earth. President Biden tweeting, the current drop in gas prices is the fastest decline in a decade, down $0.83 since June. So where are we headed? Regina Mayor, KPMG's global head of energy, is with us now. So oil prices fell pretty significantly to start the week on that data out of China. Where do you think we're headed with that OPEC meeting on deck tomorrow?

REGINA MAYOR: I'm expecting OPEC to stay the course. They're going to use some of the temporary pullback in price and some of the increase in stock supplies as a rationale for keeping things flat, partly because conventional wisdom doesn't believe they actually have spare capacity, you know, and partly believe-- partly because they want to maintain the price momentum that they do have. We've seen oil price close down for two straight months, June and July. And we haven't seen that since 2020.

SEANA SMITH: We heard very bad news story yesterday of Stifel, who was saying that he thinks we're going to get to 85 bucks by the end of the year. In order for that to happen, what needs to happen on a global scale? Because I think there's lots of concern here about demand in China. And that certainly has been what's at least weighing on crude as of the last couple of days.

REGINA MAYOR: Yeah, I think the market is really starting to price in some sort of a recession factor already in the price of crude. I'm not as bearish that we'll get to 85 by the end of the calendar year. I think we could still see triple digits throughout this calendar year because the underlying fundamentals of the supply restriction that we have haven't changed.

And so we're expecting demand to drop more substantially, but we already are in a lower demand environment, with China under COVID lockdowns. And we're actually starting to see some demand destruction in gasoline consumption with the high prices that we saw in June. So we're seeing a little bit of that elasticity of demand already. So I'm not as bearish that we'll get down to 85.

RACHELLE AKUFFO: So, then, Regina, what does the situation mean not just for energy security, but really, energy management and how this should be viewed right now?

REGINA MAYOR: Yeah, I think that's a great point because as I typically talk about their four keys to success for energy management. It's security, affordability, reliability, and sustainability. And the last few months have really shown us, since, really, the war in Ukraine started, the importance of security because then that drives affordability, and then during these hot summer months with the heat waves that have been rolling across the United States, the importance of reliability.

And we don't have those three factors locked and loaded the way that we felt like we would have had maybe 12 months ago during 2021, when things were a lot rosier. So given the swirling challenges, we're going to see higher prices. It's going to put more inflationary pressure. And frankly, I'm really worried about what's going to happen if the winter is very cold for both Europe and the US.

DAVE BRIGGS: Yeah, that could be a rough situation across Europe. I want to circle back to the price of gas. You mentioned some demand destruction recently. We are today at 4.19 a gallon. That's down $0.63 in a month, but up more than a buck over the past year. Have prices peaked? Will they continue to fall into the fall?

REGINA MAYOR: I expect that we'll see some more downward pressure on price at the pump for the next few weeks, as we close out summer driving season, which is good because distillate prices are coming down as well.

As we start to shift toward propane and home heating oil types of builds and we look at inventory levels there, that could start to maybe drive more price pressure in the home for the consumers, not necessarily at the pump. So I think we'll probably see the $4 average maybe even dipping down into the high threes in some parts of the country. I think we're out of the woods in terms of the really high prices that we saw in June.

SEANA SMITH: Regina, what do you think this will do to demand? Because comparatively speaking, I guess, when you're comparing it to an average of over $5 a barrel, $4 looks very good. 3.90 looks very good. But historically, it's still very high. So where does that put the consumer and the likelihood that Americans are going to be filling up their cars more often than they were just a couple of weeks ago?

REGINA MAYOR: Well, I think some of what you were talking about earlier on your program relative to just consumer prices and how people are starting to make different choices, that's going to continue to drive lower activity. We're also seeing manufacturing declines. And that's leading to some of the declines in terms of the oil price because we know that there's lowering demand there.

So I think people will start to make different choices. You know, the airfare that-- the airline activity that we saw this summer was probably more of a bubble because of COVID. Everyone wanted to travel, and the airfares were a lot cheaper. Now that the airfare prices are going up and the price of goods are going up, the share of wallet in terms of gas is definitely going to be a concern. I think we're going to see people make different choices, which will continue to keep the price of gasoline down for the near term.

RACHELLE AKUFFO: And so when you think of where energy prices are, not just, obviously, you said, based on that bubble, but also the summer travel, which is always the peak season when it comes to not just energy prices, but also gas prices as well, what are your expectations, then, going into the fall and the winter?

REGINA MAYOR: That's where I'm looking at natural gas. And I know that we talk a lot about the price at the pump because that's what we see every day and we drive through town, and we see the very large price tags on the signs. But Henry Hub is at a 14-year high.

And so when you look at share of wallet, if a home is heated with natural gas, and that's three, four, five times what the typical price has been, that's where we're going to really see a further bite in the winter months. So I'm less worried about gasoline and distillate prices at this point. And I'm really more focused on natural gas, both here and abroad.

DAVE BRIGGS: I want to ask you before you go about the Inflation Reduction Act, which you can debate all day whether it actually brings down inflation. And we've seen both sides of that model. But without a doubt, it has a lot of impact on climate. What's the biggest impact, do you think, on the energy sector of this legislation?

REGINA MAYOR: I really haven't had a chance to digest it in a lot of detail. But my initial first blush reaction is, it's pretty balanced. It looks like there are things that they're giving around home heating and efficiency and things that would help the consumer, as well as further incentives around renewables, as well as continuing the 45Q carbon capture tax credit, which gives a lot of the oil and gas players that are looking at big investments in carbon capture and sequestration more certainty for what the future looks like.

So, first blush, it looked like it had a lot of different things for a lot of different players, which, hopefully, can pass through Congress and, ultimately, is-- achieves some of what it anticipates to achieve.