Gas prices have nearly doubled in 17 months. The global energy crisis could lift them higher

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Energy demand is back today as the world economy reopens – but supply isn’t settling down. This is why US oil prices have skyrocketed to $120 since falling to negative $40 a barrel in April 2020. Crude is set to end above $80 a barrel on Monday for the first time in seven years.
All of this is causing sticker shock for many Americans filling up at the pump—at a time of year when gas prices are generally calm. The national average price for gasoline hit a seven-year high of $3.27 a gallon on Monday, up 7 cents in the previous week, According to AAA. The gas has nearly doubled since its April 2020 low of $1.77.

Higher gas prices will only exacerbate increased inflation, squeeze the budgets of American households and hurt President Joe Biden’s political fortunes.

Natural gas prices have risen so much, especially in Europe and Asia, that power plants and factories can turn to a relatively cheap fuel source for electricity: crude.
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“It’s just a matter of trying to keep the lights on,” said Matt Smith, Kepler’s principal oil analyst for the US. “It’s essentially creating demand that doesn’t usually happen,”

$100 oil in the cards?


Citigroup on Monday raised its Brent oil forecast for the fourth quarter to $85 a barrel and said crude is likely to hit $90 at times. The Wall Street bank cited a “transition in prices this winter” and expected power plants to switch from sky-high natural gas to oil.

Citi said a “very cold winter” could see Europe “running out of gas” by February.

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Oil has long been around as a potential alternative to natural gas – except until recently, it had no financial meaning. That’s because over the past dozen years, natural gas prices have been very low, making the switch to oil unviable.

But in Europe, natural gas prices have dropped from less than $2 per million Btu last year to $55 this fall. This is equivalent to $320 per barrel of oil.

Bank of America has warned that a cold winter could push oil demand by half a million barrels per day, pushing Brent crude to $100 a barrel. This in turn would cause more sticker shock for US drivers as Brent crude prices are lower than gas prices.

“We may be just one storm away from the next macro storm,” 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.

Chinese coal prices have hit record highs amid floods in northern China, forcing the closure of dozens of coal mines. Coal remains the main source of energy in China, used for heating, electricity generation and steelmaking. China is now facing a power shortage, forcing the government to ration electricity during peak hours and some countries have suspended production.
The United Arab Emirates has become the first Gulf state to commit to Net Zero.  oil will still flow

Against this backdrop, gasoline prices in the United States have soared higher and higher – adding to the inflationary pressures gripping the economy.

Patrick de Haan, head of petroleum analysis at GasBuddy, said $3.30 gas prices nationally are likely just around the corner.

“Looking at the horizon, I don’t really see an organized drop in prices,” De Haan said. “The market is starting to feel explosive. Fundamentals are in place to keep it going.”

OPEC in the driver’s seat

While demand is strong, oil supply has not picked up.

US oil production has been slow to rebound from Covid – even as prices surge. Many US oil companies are once again over-supplying the market and are focusing more on returning cash to shareholders who have lost money over the past decade.

Despite calls from the White House for OPEC and its allies to significantly increase output, the group has only brushed off a gradual production increase in early 2020. For now, they are content to allow oil prices to remain elevated.

“They’ve always been swing makers,” Kepler Smith said, “but my gosh, they definitely have power right now.”


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