New York (CNN Business) – Energy was very cheap in the first quarter of 2020, when roads and airports were almost empty during the peak of the covid-19 pandemic.
Demand for energy is making a comeback as the world economy reopens, but supply just hasn’t kept up. That’s why US oil prices have soared US $ 120 since plummeting to -US $ 40 a barrel in April 2020. US oil prices closed above US $ 80 a barrel on Monday first time in almost seven years.
Crude gained 1.5% to end the day at $ 80.52. The last time oil closed above $ 80 was on October 31, 2014.
All of this is causing a price shock for many Americans who fill up their tanks at a time of year when gas prices tend to decline. The national average price of gasoline reached a new seven-year high of US $ 3.27 a gallon on Monday, with a rise of 7 cents in the last week alone, according to AAA. Gasoline has nearly doubled since bottoming at $ 1.77 in April 2020.
High gasoline prices will only exacerbate high inflation, squeeze the budgets of American families and hurt the political destiny of President Joe Biden.
Unfortunately, prices at gas stations may rise even more due to the global energy crisis.
Natural gas prices have skyrocketed so much, especially in Europe and Asia, that power plants and factories could increasingly turn to a relatively cheaper fuel source for electricity: oil.
“It’s about trying to keep the lights on,” said Matt Smith, Kpler’s principal oil analyst for the Americas. “This is essentially creating demand that doesn’t normally exist.”
Will oil reach $ 100?
On Monday, Citigroup raised its forecast for Brent oil to $ 85 a barrel for the fourth quarter and said crude will likely hit $ 90 at some point. The Wall Street bank cited “price contagion this winter” and the forecast that power plants will switch from natural gas to oil.
Citi added that a “very cold winter” could cause Europe to “run out of gas” in February.
Oil has long been a possible substitute for natural gas, but until recently it didn’t make any economic sense. This is because, for much of the last twelve years, natural gas prices have been very low, making the switch to oil unprofitable.
But in Europe, natural gas prices have gone from below $ 2 per million BTUs last year to $ 55 this fall. This is equivalent to US $ 320 per barrel of oil.
Bank of America warns that a cold winter could increase oil demand by half a million barrels a day, raising Brent crude to $ 100 a barrel. This, in turn, would have a greater impact on American drivers, as gasoline prices are based on Brent crude.
“We may be in a storm for the next macro hurricane,” Bank of America strategists wrote in a recent note to clients.
Record coal prices in China
It is not only the high prices of natural gas that influence this situation.
Coal prices in China have reached record highs amid floods in the north of the country, which have forced dozens of coal mines to close. Coal remains the main source of energy in China, used for heating, electricity generation, and steelmaking. China is now facing power shortages, prompting the government to ration electricity at peak times and some countries to suspend production.
In this context, gasoline prices have increased more and more in the United States, adding to the inflationary pressures that dominate the economy.
Patrick De Haan, head of oil analysis at GasBuddy, said gasoline prices at $ 3.30 nationwide are probably right around the corner.
“Looking ahead, I really don’t see an organized drop in prices,” De Haan said. “The market is starting to feel explosive. All factors point to this continuing.”
OPEC in command
Although demand is strong, oil supply has not kept pace.
US oil production has been slow to recover from the covid, even as prices have risen. Many US oil companies are reluctant to oversupply the market again and are much more focused on returning the money to shareholders, who have lost stacks in the past decade.
Despite calls from the White House for OPEC and its allies to increase production significantly, the group has only gradually increased production marginally in early 2020. For now, they seem content to let oil prices remain high. .
“They have always been the changing producer,” said Kpler’s Smith, “but they certainly have the power right now.”