What is behind the rise in oil prices?
 |
| Brent Crude Oil Representation |
On every time Americans top at a gas station to fill the tank, they get another economics lesson.
According to AAA -the average price of a gallon of gasoline recently hit an all-time high of $4.17 compared to $2.77 last year.And the record gasoline prices are a direct result of climbing oil prices.
According to a recent Money Advisor survey surging oil prices are Americans’ top concern for 2022 even more worrying than their ability to pay bills or broader inflation.
During the Covid-19 crash, the price of oil bottomed out in spring 2020 , but now a barrel of oil fetches almost $130 in the U.S., with higher prices a direct result of Russia’s invasion of Ukraine which is aided by strong consumer demand as the world moves on from Covid-19 and weak supply as the oil-producing countries throttle output.
 |
| Global Oil Demand And Supply |
Ukraine-Russia War And the Surging Price of Oil
 |
| Russian Military Marching towards War-zone |
The Energy giants such as Shell,Exxon and BP all pulled out of Russian energy deals, while the Biden has announced a ban on importing Russian oil and other petroleum products, which represents about 8% of U.S.-bound crude shipments.
David Bahnsen who is the chief investment officer at The Bahnsen Group( a wealth management firm ) said “The Ukraine-Russia war significantly changed the global oil supply forecasts and this is a key input into how oil is priced globally”.He further added that “The recent speed of oil‘s price surge is truly a matter of changing supply and demand dynamics, and this is not about traders and speculators trying to make a quick profit.”
After a few years of relief, geopolitical risk has re-entered the unprecedented situation, and markets are too sensitive to the latest news of tensions ramping up or slowing down. While ,this situation isn’t going away any time soon so there is no sense of relief to the international markets. |
| Global Oil Supply |
A senior trader at InspereX, David Petrosinelli said “Nothing tells me that the supply and demand imbalance and geopolitical risks are going away near future and it’s a major issue for every country, and people should be concerned about this”
The Demand side of Higher Oil Prices
When the Covid-19 Recession hit the U.S. nearly two years ago, oil prices jump along with the stock market. As the Covid-19 spread around the globe, governments rapidly and strongly imposed lockdowns in an attempt to protect their citizens. Lockdowns drove unprecedented economic disruptions in everyone's life which resulted in less energy demand and falling oil prices.
As national governments and central banks pumped trillions of dollars into the global economy to support workers and the unemployed ,oil demand came back strong later in 2020 . As thee restrictions eased by early 2021, oil had climbed back to pre-pandemic price levels. |
| COCID And Recession |
An American research note read that oil demand has recovered swiftly over the past year, even with several Covid-19 waves making their way around the world.The demand in 2021 was within 1 million barrels per day of pre-COVID levels.
OPEC Production Cuts Mean Higher Oil Prices
In April 2020, a spat between Saudi Arabia and Russia over proposed output cuts in response to the new Covid-19 pandemic frightened investors, causing the price of oil to fall to historic lows in April 2020.
But that was past. Now, the problem is that the oil supply hasn’t kept up with recovering demand.
According to the Bank of America note -The quick rebound in consumption caused crude oil and refined product inventories to fall swiftly from record high levels in mid-2020 to several-year lows in late 2021,” .
That’s why the President Biden, despite arguing for less fossil fuel consumption , has called on the Organization of Petroleum Exporting Countries (OPEC) and its allies to increase oil production.
Biden said at the most recent G-20 meeting that the idea that Saudi Arabia and Russia and other major oil producers are not going to produce more oil so people can have gasoline as an alternative .
According to the U.S. Energy Information Administration Saudi -Arabia which is OPEC’s most important member nation, produced 10.8 million barrels of oil per day in 2020. That’s down from 12.1 million of last two years.
 |
| Saudi Arabia Energy Sector |
CFRA chief investment strategist Sam Stovall said that OPEC’s plan to throttle back its oil wells, and the commitment to that plan, will likely maintain upward pressure on prices.
U.S Oil Production Slow to Respond
Mace McCain, chief investment officer at Texas-based Frost Investment Advisors said that The U.S. oil rig count is currently at 520, after hitting a low of 295 on previous year. He further added that we are still well below the level of 2014 high of 1,609 rigs operating. The oil giants are reluctant to increase exploratory spending by the big producers, a trend that’s been growing since 2015.Because they don’t want to invest heavily on new wells only to see supply increase, prices decline and their profits decrease.
This was a major driving force that helped propel the U.S. to become the number one global oil-producing nation over the last one and half decade.While, many companies went bankrupt as they overextended themselves building out infrastructure, only to see oil and petroleum prices plummet on greater and greater supply.
Meanwhile, there’s a large push by some of the world’s largest institutional investors to steer investment toward companies with low levels of environmental, social governance (ESG) risk. That’s moved money away from oil and petroleum producers when those dollars would help increase production.Jack McIntyre, a portfolio manager at Brandywine Global, said that underinvestment because of ESG is one of the confluence of issues causing the price to increase.
 |
| Oil and Petroleum |
So ,that is all about the cause and effect of rising global oil prices.
0 Comments
If you have any doubts ,please let me know.