Why is the price of gas going up?

The Russian invasion of Ukraine sharply increased global commodity prices, particularly for oil, sending the cost of crude oil and in turn, prices at the gasoline pump, soaring. Gas prices in the U.S. have averaged around 20% higher than where they were prior to the invasion on February 24. The implied additional dollar burden of higher gas prices, assuming no change in the quantity of gas consumed, is around $7 billion per month.

“This represents a non-trivial drag on consumer demand, first at the individual level given the direct compression in discretionary income and then from a societal vantage point, as the initial drag on consumption propagates and accumulates through the economy,” said Peter McCrory, U.S. Economist at J.P. Morgan Research.

Gas is an essential purchase for the majority of U.S. consumers, so demand for gas at the pump does not tend to dip initially when prices rise. Nominal spending at gas stations initially jumped alongside the spike in gas prices, even after accounting for pre-pandemic gas station spending patterns in March.

“After taking into account the modest reduction in gas volume consumption, we think the 20% spike in gas prices may be lowering nominal non-gas consumption by $9.6 billion per month—shaving 0.26% off of overall nominal consumption on an annualized basis, concentrated in the second quarter. Despite the buffer of excess savings, elevated gas prices nevertheless appear to be weighing on real consumption,” said McCrory.

According to Ukraine’s Ministry for Agrarian Policy and Food, spring crops have been planted on 4.7 million hectares, accounting for over 30% of intended area as of May 2^nd. The Ukrainian Agribusiness Club has estimated that 70% of 2021 area could be planted. Planting of the major spring crops corn and sunflowers are likely approaching the halfway mark, having been reported at 37% complete on 2 million hectares and 2.4 million hectares, respectively, on May 2^nd.

“The Ministry has published a very useful account on farming on the front line of the conflict, a stark reminder of the reality for Ukrainian farmers, risking their lives in an effort to feed their country and the world. While there is no shortage of challenges to overcome, the planting effort is one of national priority. Diesel supply shortages remain a primary issue – particularly in the east. More widespread however is the challenge of accessing farm credit, particularly in an environment of rising domestic agricultural inventories as seaports remain closed, hampering export sales indefinitely,” said Allen.

Are food prices set to keep rising?

Price rises are likely to continue, as mounting inflationary pressures stemming from food markets and supply-side risks are now becoming inevitabilities as the conflict persists.

Adding further complications to the unprecedented supply side challenges for agricultural markets, La Niña is lingering for longer than originally projected and now threatens U.S. spring crops, after wreaking havoc across South American grain and oilseed production earlier in the year.

In yet another extension, the National Oceanic and Atmospheric Administration (NOAA) now suggests that the seasonal climate pattern entrenched for much of the last two years, which drives rainfall and temperature anomalies across the Tropical Pacific, will persist through the Northern Hemisphere summer. Climate models suggest that there are even chances of a La Niña state lingering through the autumn – which must be monitored for new season Latin American crops. The combination of elevated fertilizer and input prices with uncertainty over fertilizer application rates in a La Niña seasonal pattern raises important questions for U.S. yield potential and abandonment rates.

“Drought is already entrenched across the U.S. Plains – typical of a La Niña winter. The outlook according to our in-house meteorologist suggests that this will likely intensify into early summer, particularly across the Southwest, parts of the Plains and Texas, weighing on yield potential for winter wheat, cotton and corn particularly. We continue to see further upside price risks for milling wheat amid persistent challenging growing conditions in the U.S.,” said Allen.

Corn remains the market most physically exposed of agricultural commodities to the Russian conflict in Ukraine and to shortage risks on a longer-term basis, due to challenges for the imminent spring planting in Ukraine (April – May). 

However, wheat prices are expected to rise the most of all agricultural markets over the coming months, potentially by more than an additional 40%, as consumers have limited forward coverage and are buying hand to mouth amid a deteriorating production outlook.

Equally, vegetable oil markets have a more bullish outlook after the shock decision of Indonesia to ban edible oil exports from April 28th - including palm oil, which will draw on global soybean oil and rapeseed exports as replacement oils. This adds to the existing loss of Ukrainian sunflower oil exports on the world market.

J.P. Morgan maintains its forecast for 23 million tonnes of Ukrainian corn exports for 2021/22 ending September, albeit with caution. New crop production remains the primary risk with the planting season opening through April and May.

“To reach our 23 million tonne 2021/22 export forecast, one million tonnes of corn (approaching maximum line capacity) would have to be exported each month for the remaining five of the marketing year,” added Allen.