You can predict tomorrow's gas prices if you know the seven general trends that impact them. That will give you the background to understand general price moves. You should also take a moment to find out how gas and oil futures contracts work. These give you the price movements that will occur over the next few days and weeks.
- Factors contributing to gas price volatility are: seasonal demand, supply circumstances, natural disasters, petrodollar value, market speculation, alternative energy sources, and regional variations in taxes and logistics.
- The commodities market reflects trends in present and future gas prices.
Seven Predictable Trends That Affect Gas Prices
Gas prices are highly volatile. That's not just because drivers have few other choices, but also because so many events affect them. Before you can get into the nitty-gritty of predicting tomorrow's gas prices, you need to be aware of the seven underlying trends. They will help you predict both seasonal changes and sudden spikes in gas prices.
A good place to find out about these trends is the Energy Information Agency (EIA).
Each month, the EIA updates the Short-Term Energy Outlook. It reports on current oil and gas prices. It also tells you if any of the seven trends are currently affecting them. It also forecast average prices for the next year. There is a wealth of data on this site that gives historical gas prices, so you can drill down to look at trends.
Gas prices typically rise in the spring and summer and drop in the fall and winter. Demand for gas increases during the summer as most American families go on road trips. It's also because gas formulations include more ethanol in the summer to reduce the effects of global warming.
Refineries start gearing up for summer gas production in the spring. They close for needed maintenance. They also switch over their processes to include the higher levels of ethanol. Although shut-downs are publicized in advance, gas prices can rise if too much supply is cut off. Prices usually drop in the fall as demand drops.
Gas prices rise after hurricanes or other natural disasters. That's because most refineries border the Gulf of Mexico. If they are damaged, gas distribution is compromised. Right after Hurricane Katrina, gas prices spiked to more than $4.00 a gallon, adjusted for inflation.
As pandemic restrictions took effect, demand for oil fell 5.6% in the first quarter of 2020. A drop in demand was worsened by a supply glut, even though producers cut back on production. By April 20, 2020, the price for a barrel of oil had fallen to -$36.98. Traders were willing to pay someone else to take delivery of the oil since they couldn't store it.
Major threats to the world's oil supply can drive up the prices of both oil and gas.
Most supply threats start in the Middle East, the source of most of the world's oil.
For example, in 2012, Iran threatened to close the Straits of Hormuz. Through this strategic chokepoint flows 21% of the world's oil. Israel and the United States rattled their sabers in response, driving gas prices to $3.99 a gallon by April.
Commodities traders can create a price bubble through sheer speculation. This happened during the 2008 financial crisis. When the stock market crashed, traders turned to oil futures to make money. Even though demand was falling and supply was rising. On July 3, 2008, domestic oil prices rose to a record of $145.31 a barrel. It soon sent gas prices to $4.16 a gallon.
Gas prices vary regionally depending on state taxes and regional formulations. For example, California prices are usually the highest, thanks to taxes at $0.79 a gallon. When there is a shortage in one area, it's difficult to use gas from another region because there are different formulations. That's one reason a supply shortage in California drove prices to $4.66 a gallon on Oct. 6, 2012, while the average U.S. price was a dollar lower.
The value of the dollar can affect oil and gas prices. Oil contracts are priced only in dollars. As the value of the dollar rises, the price of oil often falls. Oil-importing countries profit from the rising dollar value, so they don't need to charge as much for oil. That was the case between 2014 and 2016 when the dollar started getting stronger and global oil prices fell.
Last and also least is the trend that one day the world will run out of oil. That's such a long-term trend that it isn't a factor in any price changes so far. There are still plenty of reserves in Saudi Arabia, the primary source of today's oil.
Gasoline and Oil Futures Contracts
To get a closer look at future gas prices, go to the commodities markets. There, traders bid on gas delivery for the next month. That's called a futures contract, and it's an agreement between a buyer who will use the gas and a seller. The buyer can be a gas distribution company, a transportation company, or a large corporation. The seller is usually a refinery.
Many commodities futures traders have no intention of taking ownership of the gasoline. Instead, they are looking to make a profit on the trade.
They buy now, hoping that the actual price will rise so they can sell the contract at a profit. These traders are responsible for a lot of the volatility in gas prices. They anticipate and then exaggerate actual supply and demand trends.
The commodity is called the New York Harbor RBOB Gasoline futures contract. The daily charts show what traders are bidding and closing on contracts for each month in the future. There is more volume for delivery dates closer to the present, so these prices are more reliable. Because so many things can change to affect the price of oil and gas, these charts change daily.
You can also trade gas futures directly through CME. It's another way to profit directly from your predictions of tomorrow's gas prices.
Another indicator of tomorrow's gas prices is the future contracts price for Brent Crude Oil Futures. For the most part, gas price futures contracts will follow oil price contracts. Occasionally oil prices will be low, but gas prices spike due to distribution failures from natural disasters or seasonal plant shutdowns.
Look at both charts to get confirmation, and to understand what is happening to affect gas prices. Armed with this knowledge, you will able to predict tomorrow's gas prices today.