By Laura Sanicola

(Reuters) – U.S. drivers could see their gasoline prices drop below $3.00 per gallon over the next few weeks as crude oil futures suffered the steepest declines since April 2020, when a new coronavirus strain threatened to prolong the pandemic.

An additional fall in pumps prices, from their October seven-year highs would reduce inflation in the United States. Inflation rose in October to its highest level in 31 year. Due to rising fuel prices, the surge in inflation hurt Joe Biden’s popularity.

Omicron’s new variant will likely affect gasoline prices in the United States more than last week’s coordinated release of crude oil from the strategic reserves of the major consuming countries announced by Biden.

Already, fuel demand is being affected by the reimpositions of restrictions on air travel. It will all depend on how much mobility restrictions are imposed in order to prevent the spread of the variant.

Tom Kloza from the Oil Price Information Service (OPIS), global head for energy analysis and global head of gasoline, said that gasoline prices would decrease in coming weeks. He stated that this was due in part to lower fuel demand during winter months, which is due to the colder days and less frequent use.

Continued price declines may be bad news.

Kloza stated, “Be cautious what you wish for. Nobody really wants the new virus to lower economic activity and reduce energy demand.”

WHY DID OMICRON VARIANT CAUSE OIL PRICES TO FALL

On Friday, futures dropped more than $10 per bar to $68.15, as concerns about fuel shortages due to the return of travel restrictions and fears that an oil supply surplus could occur in the months ahead led to fears of futures falling to $68.15.

After the reopening of oil markets late Sunday, prices rose to more than $3. Prices will continue to fluctuate as scientists analyze the new variant and traders return home from the U.S. Thanksgiving holiday.

Patrick DeHaan of GasBuddy’s petroleum analysis said that if Friday’s losses are combined, the drop in gasoline wholesale prices could bring the average national gasoline price below $3.00 per gallon.

DeHaan stated that motorists should not rush to get gas if there is a fall in the market.

DeHaan explained that while wholesale prices may not reflect at the pumps immediately, it can take days or even weeks. This is because retail tends to absorb decreases in 1- to 3-cent increments over a period of time to secure margins.

Friday’s tumble in unfinished gasoline futures (RBOB), was around 30 cents (12.5%) Buyers who expect more losses on the global markets or delay buying could cause prices to fall even further. Kloza said that large gasoline dealers have probably not purchased gasoline at lower prices yet.

“If you are a large store and believe that prices will fall, don’t delay in buying,” he stated.

WHAT HAS THE WHITE HOME DONE TO REACT TO INCREASED OIL PRICES?

Oil prices rose quickly after the Pandemic, as countries recovered and the demand for fuel increased faster than the supply.

Last week, the average U.S. gasoline retail price was $3.40 per regular gallon. This is an increase of roughly $2.11 a year ago. Consumers were alarmed by the rapid increase of 61% in 12 months.

Biden said that oil prices should be lower than they are in remarks about the release of the strategic reserve. He was referring to the gap between futures (or wholesale prices) and retail prices.

Over the six week period, this gap has increased from approximately 78c to around $1.14 per gallon. It is now the widest since April 2020. Average five-year price is 85c.

Graphic: The gap between retail and wholesale gasoline costs – https://fingfx.thomsonreuters.com/gfx/ce/mopanlbzdva/Pasted%20image%201637167261249.png

What is the difference between WHOLESALE FUTURES and RETAIL GASOLINE PRICES?

If retail prices fall sharply wholesale prices tend to diverge. This is because retailers usually respond with a delay. The gap increased to $1.64 per gallon in March 2020 as wholesale prices plummeted due to the worsening coronavirus pandemic and the flood of barrels from Russia and Saudi Arabia. For two months, it did not return back to its normal distribution.

The gap grew to $1.11 in November 2018, and it took many months for the gap to fall.

Graphic: States with Highest Gasoline Taxes – https://fingfx.thomsonreuters.com/gfx/ce/zgvomkxzzvd/Pasted%20image%201637703565469.png

What IMPACTS THE GASOLINE PRICE?

According to U.S. Energy Department, crude oil is responsible for over half the price. This price can be determined largely by global supply and demand.

Consumers pay extra for the blending of ethanol, and for marketing and distribution. Kloza reports that these costs have gone up significantly in the last few months.

About 17% of the total cost is borne by taxes. Federal gasoline taxes are 18c per gallon. Average state taxes and fees average 30c, but this can vary.