Increased demand is boosting oil prices which translate into rising gas prices.
David Paul Morris/BloombergBad news for your wallet: Eye-watering pump prices for gasoline are likely here for a while.
Worse still, Tuesday’s announcement by the Biden administration to release oil from the strategic petroleum reserve (SPR) likely won’t have a prolonged effect on dampening pump prices, experts say.
Other significant factors will keep them elevated longer term, including actions by the Organization of Petroleum Exporting Countries plus Russia, known as OPEC+, green energy policies in the U.S., and investor demands.
“I don’t think the SPR release will help that much,” says Stewart Glickman, a senior equity analyst at CFRA. “You’ll likely get a short-term alleviation from the pain in a similar way to taking an aspirin to fix a headache.”
Across the U.S., gas prices averaged $3.40 a gallon as of Nov. 23, up 61% from $2.11 a year ago, according to AAA. Glickman says they could easily go as high as $3.70, depending on the oil price. Likewise, prices for reformulated gasoline futures contracts on the CME have rallied over the past year.
The cause of high gas prices is simple: Oil supplies are not likely to keep up with increases in demand as the global economy rebounds from the Covid-19 pandemic lockdowns. Typically, excess demand leads to higher oil prices which then translate into rising gas prices. Brent crude, the European benchmark, was recently fetching $82 a barrel up from about $47 a year ago, according to TradingEconomics.com.
Three major factors are likely to keep the price elevated over the next year. The first is OPEC+, which has modest oil production increases planned. “OPEC+ is sticking to its steady progression of quota increases, yet its actual production deficit continues to grow,” notes a Morningstar report.
That lack of OPEC+ supply response should be worrying. Crude demand is expected to exceed pre-Covid levels next year, says Rob Thummel, a portfolio manager at TortoiseEcofin. In other words, supply increases from the oil cartel likely won’t keep up with growth in demand.
The second issue is that the Biden administration policies are restricting a supply response from the U.S. energy industry. It might sound brutal but the noble goal of promoting clean energy is helping elevate gas prices. “[The administration’s approach] is the first to be fairly hostile towards the domestic oil and gas industry,” says a recent report from CFRA. “Any policy that effectively deters incremental supply of crude oil should elevate prices.” And it has seemingly done just that.
Investors are also having an impact on oil prices. Wall Street has long wanted to see exploration-and-production (E&Ps) companies take a more measured approach to expanding production. The energy industry overexpanded during boom times with new exploration-and-development projects. But now big oil has finally gotten the message: look after shareholders before anything else.
“Once spendthrift E&Ps continue to keep their purse strings drawn tight, eliminating the former source of incremental supply,” the Morningstar report states. The result: Oil inventories could plummet to levels not seen in over half a decade.
What can investors do to mitigate these wallet-emptying fuel costs? Try buying unhedged oil stocks such as ConocoPhillips (ticker: COP) or Occidental Petroleum (OXY), says CFRA. Both look poised to benefit from next year’s likely high oil prices.
Of course, oil and gasoline prices could fall if demand falls, such as in the event of another wave of Covid-19 lockdowns, like those recently announced in Austria and other European countries. A week ago, the risk of widespread lockdowns seemed remote—now less so.
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November 24, 2021 at 04:15PM
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