With crude oil prices rising towards $100 a barrel on Ukraine tensions and tight supplies, industry watchers see fuel price rises continuing for months.
Crude oil prices reached $90 a barrel on Thursday for the first time since 2014 on greater uncertainty over Russian saber rattling at Ukraine and tight supplies elsewhere.
Oil reaching the $90 mark is “certainly another psychological barrier passed,” said Patrick De Haan, head of petroleum analysis at GasBuddy, a Boston-based provider of retail fuel pricing information and data. The national average price for gasoline should continue advancing to as high as $3.50 a gallon in the next week or two, De Haan said.
“With everything that’s weighing on oil right now, I can’t think of any bearish factors, but nearly all of them are bullish,” he said. “I don’t think we’ll stop here and Americans will have to dig deeper as a result.”
California’s state average will eventually surpass $5 a gallon as soon as March and the rest of the nation is on pace to surpass $4 by this spring, De Haan said.
While the Russia/Ukraine conflict is one of the factors pushing prices up, the lack of new supply as demand continues to recover from the pandemic is another one, he said.
“It’s not going to be a good year if you’re a motorist and there’s not much light at the end of the tunnel, at least for the next few months,” De Haan said. “If Russia does invade Ukraine, we could see prices jump even more.”
As the demand for oil continues to rise, consumers should plan on paying more money for gasoline, especially this summer, said Bud Weinstein, emeritus professor of applied economics at the University of North Texas.
“With global oil demand growing rapidly and OPEC + slow to increase output, gasoline and diesel prices are at their highest levels since 2014,” he said. “As recreational driving picks up in the spring and summer, oil could well exceed $100 per barrel with average gasoline prices in the US close to $4 per gallon.”
The two main drivers for oil rising to over $90 a barrel consist of supply growth being slower than demand growth and the amount of risk since the amount of spare capacity globally if an outage occurs will be hard to cover, said Richard Joswick, head of global oil analytics, S&P Global Platts.
“People are looking at missile attacks on the UAE and the risk of conflict between Russia and Ukraine and whether there will be a deal with Iran or not,” he said.
When demand was low during the beginning of the global pandemic, Iran’s production of oil was not needed to balance the world’s demand, Joswick said.
“As demand is growing back, the amount of spare capacity in the UAE and Saudi becomes smaller and the market is pricing in these risks,” he said. “It is hard to put a dollar sign to price in risk.”
One factor with commodity future funds is that the oil market is in steep backwardation which means the commodities index funds get a benefit from the roll of one contract to another one to improve their yield, Joswick said.
“The contracts are bought, held for a month and then sold and they capture a month’s worth of backwardation,” he said. “Backwardation is a signal of low oil inventory and that excess oil does not need to be held. People need that oil today.”
The outlook for oil prices assuming there are no major disruptions or giant losses from Ukraine, the supply balances should be building inventory and should increase in the next three to four months.
While Ukraine does not produce oil, Russia produces about 10% of the world’s energy and some of the Russian oil and natural gas is transported through pipelines across the Ukraine to Europe and elsewhere, Joswick said.
“The oil and gas pipelines across the country would be at risk for Europe and price implications for any country,” he said.
Since 2020, U.S. oil producers lowered their spending for capital expenditures and decreased supply from 13 million barrels a day to below 11 million per day, said Rob Thummel, senior portfolio manager at Tortoise in Overland Park, Kansas.
“Gasoline prices are higher as a result because of higher oil prIces are not impacting mobility,” he said. “Demand among consumers is steadily growing.”
While oil prices will be increasing for the next several months, if crude oil prices are too high, it could constrain demand.
“At this point we don’t want oil to go too high since it could have an impact on global demand,” Thummel said. “If OPEC can’t catch up with production and the U.S. does not increase supply, oil prices will be over $100 by the summer.”
