High gas prices will only exacerbate elevated inflation, squeeze the budgets of American families and hurt President Joe Biden’s political fortunes.
“It’s a case of just trying to keep the lights on,” said Matt Smith, Kpler’s lead oil analyst for the Americas. “This is essentially creating demand that typically isn’t there,”
$100 oil in the cards?
Citigroup on Monday ramped up its Brent oil forecast to $85 a barrel for the fourth quarter and said crude will likely hit $90 at times. The Wall Street bank cited “price contagion this winter” and the expected switching of power plants away from sky-high natural gas to oil.
Citi added that a “very cold winter” could see Europe “running out of gas” by February.
Oil has long been there as a potential substitute for natural gas — except until recently, it didn’t make any financial sense. That’s because for much of the past dozen years, natural gas prices have been very low, making switching to oil uneconomical.
Bank of America has warned that a cold winter could boost oil demand by half a million barrels per day, lifting Brent crude to $100 a barrel. That in turn would cause more sticker shock for American drivers because gas prices are priced off Brent crude.
“We may just be one storm away from the next macro hurricane,” Bank of America strategists wrote in a recent note to clients.
Record coal prices in China
It’s not just high natural gas prices that are playing a role here.
Against this backdrop, gasoline prices have crept higher and higher in the United States — adding to inflationary pressures gripping the economy.
Patrick De Haan, head of petroleum analysis at GasBuddy, said $3.30 gas prices nationally are likely around the corner.
“Looking out on the horizon, I really don’t see an organized drop in prices,” said De Haan. “The market is starting to feel explosive. The fundamentals are there for that to continue.”
OPEC in the driver’s seat
While demand is strong, oil supplies have simply not kept pace.
US oil production has been slow to rebound from Covid — even as prices have surged. Many US oil companies are leery of once again oversupplying the market and they are far more focused on returning cash to shareholders who have lost gobs of money over the past decade.
Despite the White House’s calls for OPEC and its allies to significantly ramp up production, the group has only gradually increased output sidelined in early 2020. For now, they seem content to let oil prices remain elevated.
“They have always been the swing producer,” said Kpler’s Smith, “but my gosh they certainly hold the power right now.”