- According to Sonu Varghese of the Carson Group, one of the biggest risks to the stock market and the economy is a gasoline price shock.
- Gas prices have already increased by 23% so far, and any further increase could lead to inflation rising again.
- Lower US inventories of refined oil products could increase price volatility during hurricane season.
According to Sonu Varghese, global macro strategist at The Carson Group, a potential gas price shock represents one of the biggest risks to the stock market and the economy.
He highlighted in a Tuesday note that gasoline prices have already risen significantly so far this year, with the average retail price rising 23% to $3.80 a gallon.
While this is still well below the June 10, 2022 peak of $5.00 per gallon, further increases in gas prices could weigh on consumer spending and accelerate the pace of inflation again.
According to the Energy Information Administration, gas pump prices are primarily driven by the price of crude oil, which makes up about 50% of the cost equation. But gas pump prices are also driven by the price difference between crude oil and refined products, known as the “crack spread.”
Crack spread makes up about 25% of the cost of a gallon of gas, while taxes, distribution and marketing make up the remaining 25%.
What worries Verghese is that the crack spread has increased in the past few months, as they did in 2022 when gas prices reached record highs.
He explained, “The crack spread usually increases when there is no more inventory of the refined product, that is, less stock of gasoline, diesel and even jet fuel. This happens due to various reasons, including refinery shutdowns, And that includes a lack of investment in capacity.”
With US petroleum inventories below the 2015-2019 average, that could leave the gasoline market vulnerable to supply shocks that would eventually push prices up.
“It happened when Russia invaded Ukraine. We got another reminder of that last week when a storage tank fire broke out at an oil refinery in Louisiana, the third largest in the US,” Varghese said.
Their bigger concern is that rising gas prices could negatively impact the broader economy. This is because higher gas prices at the pump take a toll on consumer sentiment and can lead to spending cuts.
Meanwhile, higher prices could feed inflation again as gas is a key input in many industries, including food delivery costs. Airfare is also highly sensitive to the price of fuel.
A rebound in inflation will likely make the Federal Reserve maintain its tight monetary policy stance and raise interest rates further.
Rising gas prices “become an immediate problem for two reasons in particular: It could force the Fed to respond and raise rates again, and quickly, [and] This reduces the real income of families,” Varghese said. “We saw both play out last year. The economy was resilient enough to overcome this, but I don’t want to see the economy struggle with this again.”
While he remains optimistic on the outlook for the stock market and economy, he worries that another gas price blow could become a major deterrent for investors and consumers.