Chart of the Day: Falling oil and gas demand implies inflation relief

REAL ECONOMY BLOG | October 05, 2023

Authored by RSM US LLP

Easing demand for oil and gasoline should provide relief in top-line inflation in October and November.

Falling wholesale gasoline prices imply a decline of 12% in retail gasoline prices in the coming weeks from its current level of $3.79 to roughly $3.34 per gallon.

This is consistent with the decline in the domestic West Texas Intermediate benchmark price of $82.57, which has fallen by 10.9% from a recent peak of $93.68 on Sept. 27.

Although wholesale gasoline futures are not a prescient indicator of future retail prices, a decline toward $3.34 is in line with the three-year retail average of $3.16 since Jan. 1, 2020.

We think that this decline, along with the tightening financial conditions driven by rising bond yields and falling equity prices, will help the Federal Reserve decide to keep its policy rate between a range of 5.25% and 5.5% at its next meeting on Nov. 1.

Softening demand

Data published by the U.S. Energy Information Administration indicates that the four-week average of fuel consumption has declined to 8.3 million barrels per day, which is the lowest level on a seasonal basis since 1988.

While there has been much conjecture around oil exceeding $100 per barrel, the recent increase in oil prices because of supply cuts by OPEC appears to have run up against softening global demand driven by weak economic activity in China and the European Union.

Brent crude, the global oil benchmark, has fallen from a recent peak of $96.55 on Sept. 27 to $84.49, or a decline of 12%.

This article was written by Joseph Brusuelas and originally appeared on 2023-10-05. Reprinted with permission from RSM US LLP.
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