NEW YORK (TheStreet) -- 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, who threatens to retaliate against Western embargoes of its oil imports by closing the Strait of Hormuz, which allows for the passage of as many as 20 million barrels of crude oil 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 that retail gasoline prices at around $3.45 a gallon represents 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 scale against the recovery in U.S. consumer confidence.
Tim Evans, Citi futures perspective energy analyst, says that retail gasoline prices could breach the $4 spike achieved in 2008, if Iran were to make any major moves of this nature.
"We are very concerned about the role that Arab Spring subsidies to stop revolts in countries with monarchies, and ... Iran could play beyond underlying demand," adds Swonk.
"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," said Michael Feroli, JPMorgan's chief U.S. economist.
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 driven gasoline price spikes when demand starts to pick up again towards the summer peak driving season period, say analysts.
"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."
recently decided to shut down operations at three of five of its refineries across Europe due to credit constraints. Meanwhile, U.S. northeast closures have or will be taking place at
185,000 barrels-per-day Trainer, Pa. refinery and
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 going forward. 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 that retail gasoline prices could jump to $3.80 in the summer from roughly $3.25 now. Meanwhile, looking at just the Northeast, Energy Security Analysis' president Sarah Emerson predicts an average, summer time high of roughly $3.60. A summer time 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 home buying," says Trulia chief economist Jed Kolko. Home sales tend to be highest around June.
Kolko adds that high gasoline prices would especially dissuade home buyers from purchasing in outer suburban areas, where commutes are longer. This could, in turn, hurt government plans to rent out foreclosed homes, as many of them are in outlying areas, the economist points out.
Rich Ilczyszyn, chief market strategist and 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, due to 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 potential 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 OPEC (Organization of the Petroleum Exporting Countries) members. "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
-- a joint venture between
-- of its Port Arthur, Texas refinery to 600,000 barrels a day, may also help prevent supply-constraint driven gasoline prices spikes.
Meanwhile, Harry Tchilinguirian, BNP Paribas' head of commodity markets strategy, says that lost European product output can be met by production by plants elsewhere in Europe; while other analysts say that during the summer, European imports may not make much of a difference on supply any way, 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, chief oil analyst at the Oil Price Information Service.
-- Written by Andrea Tse in New York.
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