US gas prices continue to fall

The national average for a gallon of regular gas broke $4 last week and stood at $3.943 on Tuesday. According to the American Automobile Association, gas prices vary significantly among different states. The graphic below shows average gas prices by state.

A decrease in gas prices would be beneficial for price stability, Fed policies, and global markets. The chart below shows gas prices over the past 5 years. Prior to the trend of inflation and price increases since last June, the average gas price for Americans was between $2-3 a gallon.

And if we put the WTI crude oil price on the same chart as gas price, we can see that both crude oil and gas prices moved in the same direction, especially before 2020.

We can further analyze that: 
A barrel of crude oil is 42 gallons, and the cost was between $50-75 in 2017 and 2018, while the corresponding gas price ranged between $2.3-3. This means that the cost of crude oil per gallon was $1.2-1.8, which was 50-60% of the retail gas price.
Currently, the cost of a 42-gallon barrel of crude oil is around $90, and the average cost per gallon is $2.14, which is 53% of the current average retail gas price.
Retail gas price is driven by three components: crude oil, transportation, and refinement. Retail gas prices have been increasing proportionately with rising crude oil prices, but transportation and refinement costs are inflating at a slower rate. Therefore, retail gas price inflation is outpacing overall costs, translating to a greater profit margin.

Hence the reason why oil manufacturers have generated record-high profits in the second season. Take Buffett’s favorite, Chevron, as an example: its earnings per share doubled in Q2 compared to last year. While US demand for energy is almost the same as in 2019, Chevron has made more than 3x in profits. Last year, Biden ordered the FTC to investigate oil companies, and Democrats accused the oil industry of ripping off Americans as they increase retail prices while the cost is decreasing.

US inflation reached a new 40-year high in June at 9.1%. Many Americans disapprove of Biden’s handling of soaring inflation and gas prices, indicating that economic security remains a high priority for the voting population. The chart below shows Biden’s approval rate, which peaked last June.
Last June was also when US inflation began to rise.

#1. Fed officials see interest rate hikes continuing but pace could slow

• Fed officials saw "little evidence" late last month that US inflation pressures were easing and steeled themselves to force the economy to slow down to control an ongoing surge in prices. 

• Traders lowered the likelihood of a 75-bps hike by the Federal Reserve in September to less than 50%.

#2. Bed Bath & Beyond shares fall after investor Ryan Cohen reveals intent to sell entire stake

• Investor Ryan Cohen filed a notice of intent to sell 7.78 million shares of the houseware retailer.

• Cohen’s prior purchases of call options had contributed to a buying spree in Bed Bath & Beyond, with the stock up in 15 of the past 16 sessions and increasing more than five-fold in value over that time.

#3. Kohl’s slumps after the retailer cut its full-year forecast

• Kohl’s again slashed its financial forecast for the year, saying its middle-income customers have been particularly pressured by higher inflation, putting a damper on sales of apparel, shoes, and other discretionary items.

• CEO Michelle Gass said in a statement that the company is adjusting its business plans and taking actions to reduce inventory and trim expenses “to account for a softer demand outlook.”

#4. Tencent says Meituan stake-sale report is not accurate

• Tencent suffered its first ever drop in quarterly revenue, hit hard by stricter regulations on the gaming industry and a resurgence of Covid-19.

• Reuters reported that the social media giant intends to sell all or much of its $24 billion stake in Meituan. Strategy officer James Mitchell says the report “is not accurate.”

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