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The EIA with a nod to inflation risk the agency said higher prices and more gasoline consumption would result in the average U.S. household spending about $570 (38%) more on motor fuel in 2021 compared with 2020. Crude oil and other commodity prices are inputs to key sectors of the economy.

EIA STEO June 21 Oil and inflation

Oil prices have surged to the highest prices since 2019. WTI settled over $70 today, Tuesday. The increase in economic activity and easing of the COVID-19 pandemic have contributed to rising energy use. U.S. gross domestic product (GDP) declined by 3.5% in 2020 from 2019 levels. The June STEO assumes U.S. GDP will grow by 6.7% in 2021 and by 4.9% in 2022. The U.S. macroeconomic assumptions in this outlook are based on forecasts by IHS Markit.

TIPS and Inflation

The percentage difference in yields for five-year Treasury Inflation-Protected Securities (TIPS) compared with U.S. treasury bonds is often used to measure market expectations of inflation. Responses to the COVID-19 pandemic resulted in a dramatic decline in demand for goods, which significantly reduced petroleum and other commodity prices in early 2020. Because crude oil and other commodity prices are inputs to other sectors of the economy, changes in crude oil prices can also affect inflation expectations. The TIPS-Treasury spread decreased to an average of 0.7% in March 2020, reflecting low inflation expectations as a result of lower prices and reduced economic activity

Because crude oil and other commodity prices are inputs to other sectors of the economy, changes in crude oil prices can also affect inflation expectations. The TIPS-Treasury spread decreased to an average of 0.7% in March 2020, reflecting low inflation expectations as a result of lower prices and reduced economic activity 

Inflation expectations have generally increased since August 2020. The TIPS-Treasury spread increased from 2.55% on April 1, 2021, to 2.60% on May 3 (the first trading day of May), before reaching a high of 2.72% on May 12, the spread’s highest point since 2008. The increasing inflation expectations correspond to increases in the Brent crude oil price, which increased from $65/b on April 1 to $68/b on May 3 and $69/b on May 12.

Fuel price increases for consumers and firms as a result of high crude oil prices are an important contributor to inflation expectations. However, the TIPS-Treasury spread also increased at the end of March and into April, while Brent prices remained below their mid-March levels. Differing directional movements between the spread and the crude oil price reflect the effects of other goods and commodity prices on inflation expectations.

Gasoline

EIA expect U.S. gasoline consumption will average 9.1 million barrels per day (b/d) this summer (April–September), which is 1.3 million b/d more than last summer but still more than 0.4 million b/d less than summer 2019. Weekly consumption data reflect the Colonial Pipeline outage and subsequent increase in gasoline demand, but consumption both before and after this event indicate more gasoline demand than we had previously forecast. Our latest forecast also reflects IHS Markit’s increased employment forecast.

EIA expect U.S. gasoline consumption to average 8.7 million b/d in for all of 2021 and 9.0 million b/d in 2022. For the 2021 April–September summer driving season, we forecast U.S. regular gasoline retail prices will average $2.92 per gallon (gal), up from an average of $2.07/gal last summer.

The higher forecast gasoline prices reflect higher crude oil prices and higher wholesale gasoline margins. Wholesale gasoline margins have risen as a result of relatively low inventories and rising gasoline demand. Margins also temporarily widened because of outages on the Colonial Pipeline. These developments caused U.S. average regular gasoline retail prices to reach a monthly average of $2.99/gal in May, peaking at $3.03/gal on May 17, which were the highest monthly and weekly prices since 2014. 

EIA expect that prices will average $3.03/gal in June before falling to $2.76/gal by September. The drop in forecast retail gasoline prices reflects our forecast that gasoline margins will fall this summer in response to rising refinery utilization. For all of 2021, we expect U.S. regular gasoline retail prices to average $2.77/gal and gasoline retail prices for all grades to average $2.87/gal.

CPI and PCE prices Running Hot

May's consumer price index is scheduled to be reported Thursday, and it could be hot after it surged in April. Recall the Fed'sfavorite inflation measure core PCE Price Index, which excludes food and energy, increased 3.1% ahead of consensus 2.9%,the most since 2018 and up from last month's +1.8% year-over-year. The PCE Price Index jumped 0.7% m/m, over 0.6% expected, up from.4% prior.

Global inflation reports remind us inflation is front and center. The Federal Reserve kept rates unchanged at their April meeting, kept QE infinity open with TALF for open-ended Treasuries, MBS and corporate bonds in amounts needed.

The gameplan per Fed Chairman Powell is likely to be on point for Fed speakers, a reminder from a few week's back:

“So it seems unlikely, frankly, that we would see inflation moving up in a persistent way that would actually move inflation expectations up while there was still significant slack in the labor market. I won’t say that it’s impossible, but it seems unlikely… So that’s not to say inflation won’t—might not move up, but for inflation to move up in a persistent way that really starts to move inflation expectations up, that would take some time and you would think it would be quite likely that we’d be in very strong labor markets for that to be happening.”

There is the prospect of an overheating U.S. economy, but remember we are coming off a low base and the lockdown has decimated many sectors of the economy and people's lives. The relevaton from the speed of technology adapting and disrupting to a new world with the lockdown is transformative. The shift has enabled and transformed the traditional economy that we measure future outcomes off.

Forecast depends heavily on future production decisions by OPEC+, the responsiveness of U.S. tight oil production to oil prices, and the pace of oil demand growth, among other factors.

Source: EIA

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