'Fear is setting in': Gas prices could fall further as recession looms

·3-min read
In many cities, gas prices plunged over the Canada Day long weekend.
In many cities, gas prices plunged over the Canada Day long weekend. (GETTY)

Gas prices in Canada may continue to fall this summer, but experts warn the relief at the pumps may not last unless the global economy slips into a recession.

The average price for regular gasoline across Canada as of Tuesday has tumbled 19 cents per litre, or about nine per cent, compared to the average price in June. In many cities, prices plunged over the Canada Day long weekend. Ontario saw the steepest declines, due in part to a temporary cut to the province's gas tax coming into effect on July 1.

The decreases follow a significant retreat for crude oil prices in June, and interest rate hikes from central banks aimed at reining in inflation sparking fears of a global recession. Those fears likely weighed on the minds of institutional investors in recent days as they sold out of crude futures contracts, says Rory Johnston, an oil industry analyst and founder of Commodity Context.

“Last week had all the tell-tale signs of a speculative kind of wash-out in these contracts,” he said, pointing to U.S. commodity futures trading data. "There was no fundamental trigger. There was no news story. There was nothing really.”

Johnston says contracts held by hedge funds and other money managers dropped to the lowest level since April 2020, when crude traded for around US$20 per barrel.

The price of U.S. benchmark West Texas Intermediate (CL=F) oil fell 7.58 per cent to US$96.20 per barrel at 1:21 ET on Tuesday. At the same time, recently high-flying oil and gas stocks weighed on the Toronto Stock Exchange.

“What a retreat!,” said Dan McTeague, president of Canadians for Affordable Energy. “Judging by the numbers we’re seeing in the energy markets, that fear is setting in."

On top of recession fears, global energy markets have been roiled by bans due to Russia's war in Ukraine, overall tightness of global supply, lacklustre output from U.S. shale plays, and refining bottlenecks for a number of producers.

"For me, the only thing that makes sense right now is prices going higher for crude,” Johnston said, adding he is not convinced a major economic contraction is on the way. "I think we’re going to trade pretty sideways over the course of the summer, absent a big recession, which then we would head lower, but for all the wrong reasons."

At the gas pump, he predicts average prices will hover around current levels, staying below the record highs seen earlier this year. McTeague says prices may have further to fall in the short term.

"They’re going to go even further down to perhaps the low $1.70s, high $1.60s [per litre] for the next week or two,” he said.

Like Johnston, McTeague expects the supply-side realities of the global oil market will eventually push fuel prices higher again.

"Look for a rapid reversal, and those prices to march right back up 30 cents pre litre, pushing us back towards the $2 per litre range," he said. “There is a real possibility that prices could swing back dramatically and painfully to reflect the tightness in global supplies. There’s no getting around that."

Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.

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