Crude Oil prices have jumped nearly 70 percent in three months, with each taking a position on the future.
The oil market ushered in the Biden era with a thunderclap. But don’t rejoice too soon, it represents the higher gas prices that must be paid if you want to drive on the road this spring and summer.
The American Automobile Association (AAA) notes that gasoline prices have also risen 27 percent since the election, with the average price across the U.S. reaching $2.70 per gallon at the end of February.
This surge in the energy market has nothing to do with the political side, nor even with policy. Rather, it reinforces the sense that the deadly new coronavirus pandemic is almost over and that the U.S. economy is ready to take off again. Wall Street, backed by the Federal Reserve’s (Fed) easy money policy, is bullish that Americans’ appetite for oil will soar.
Jason Bordoff, founding director of Columbia University’s Center for Global Energy Policy, said, “As the world begins to vaccinate itself against the effects of the Epidemic, higher oil prices reflect optimism about economic growth.”
The United States has made significant progress in recent months in the fight against the new coronavirus. Late last year, Pfizer (Pfizer) and Moderna both launched high-performance vaccines, and while production was slow at first, it has since accelerated, with more industries such as Johnson & Johnson also producing single-dose injectable vaccines.
As more and more Americans get vaccinated, whether by air, by car or by good cruise travel, will in turn drive the collapse of oil demand due to the public health crisis. The U.S. Bank of Commerce forecasts that crude oil demand will increase at the fastest rate since the 1970s through 2023.
The new crown epidemic coupled with the price war waged between Saudi Arabia and Russia saw one of the darkest days for the oil market last April. Crude oil futures prices fell below zero, briefly touching minus 37 per barrel.
GameStop Factor
But just as the selling has been infinitely amplified, some fear that the price rally may have gotten out of hand.
“This looks more like a financial market than a fundamental one,” said Jim Mitchell, head of oil analysts for the Americas at Refinitiv. He estimated that the supply and demand for U.S. oil prices are 7 to 8 dollars higher than they should be.
Demand for U.S. gasoline, the biggest driver of crude oil prices, has not been this weak since February 1997.
So why are oil prices rising well above fundamentals? Hot money on Wall Street is looking around for bids. the Fed’s low interest rates are encouraging investors to bet on risky assets. Everything from Amazon and GameStop to Bitcoin and SPACs are soaring. Oil is particularly representative of this wave of hype, as it typically reflects higher Inflation.
We’re riding the behavior of money higher,” said Tom Kloza, global head of energy analysis at Oil Price Information Service. But if money continues to flow in, it could become a bit like GameStop.”
In other words, this rally may not last.
For now, Wall Street analysts think the oil price rally is just beginning. Goldman Sachs (Goldman Sachs) recently estimated that the 3rd quarter U.S. oil prices will reach an average of $72 per barrel, higher than the previous $62 per barrel. Some investment banks even believe that a new “super cycle” is now underway, oil prices are expected to look up to 100 yuan per barrel.
That’s a very, very immature view,” Klosar said. It’s like a team has just won a championship and then immediately starts thinking about the road to back-to-back championships.”
The risk of $3 gasoline
The risk is that when energy prices rise to levels that are unbearable for car owners, it will slow the pace of economic recovery.
Says Kloza: “The price of $3-a-gallon gasoline has gotten as much public attention as if some MLB team had picked up 100 wins this season.”
Even though he doesn’t think the national average gasoline price will rise to $3 a gallon this year, he still warned that the White House and oil producers will suffer “irresponsible criticism” if it does.
Others are skeptical that even if energy prices are high, it will not stop Americans who have had enough of quarantine from driving on the road and flying this summer.
Rabobank (Rabobank) energy strategist Fitzmaurice (Ryan Fitzmaurice) said: “If you’re locked up at Home for a year, whether the price of gas is $40 or $90, anyone may go out on vacation.”
In any case, the less manufacturing, more electric vehicles and telecommuting presented by today’s digital economy are more than enough to withstand higher gas prices than in the past.
“The economy of the future will be much less sensitive to oil price movements than it has been in our past lifetime,” said Joe Brusuelas, chief economist at RSM International. “Many of us are still impressed by the oil price spike of the 1970s. But that’s a Ten Boom relic now.”
OPEC, which operated the 1970s oil crisis single-handedly, may soon be exporting more oil. The organization and Russia decided in early March to ease production restrictions from April, which could cool the hot crude market.
A comeback for crude oil?
The current oil rally coincides with a dramatic shift from the Trump administration, which has supported fossil fuels for four years, to the Biden Administration, which emphasizes green energy.
President Biden (Joe Biden) took office and moved quickly to address the climate crisis by announcing a return to the Paris Agreement, revoking permits to operate the Keystone XL pipeline, and ordering a moratorium on new oil and gas lease applications on federal lands and waters. These steps are a blow to the overall oil industry and could ultimately depress U.S. fossil fuel production.
However, analysts do not believe the current oil price rally is directly related to the administration’s restraint on the oil industry. Since Trump left office, crude oil prices have risen only moderately by 20 percent.
Biden’s climate policy is not linked to the current rise in oil prices,” said Bodoff, a Columbia University professor who served as an energy adviser during the Obama administration.
But the climate crisis and electric cars remain the real threats to the oil industry.
In a report titled “The Return of Oil Prices,” the U.S. Bank of Commerce predicts that electric vehicle sales will reach 34 percent of total vehicle sales by 2030, and will surpass sales of gas-guzzling vehicles by 2035. U.S. Bank of Commerce expects that global oil demand will peak around 2030.
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