Why Is The Price Of Oil Rising? – Forbes Advisor

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors’ opinions or evaluations.

Every time Americans stop at a gas station to fill the tank, they get another economics lesson.

The average price of a gallon of gasoline recently hit an all-time high of $4.17, according to AAA, compared to $2.77 one year ago. Drivers in California need to fork over an average price of $5.44 a gallon.

Ballooning prices are Americans’ top concern for 2022, more worrying than their ability to pay bills or broader inflation, according to a recent eMoney Advisor survey.

Record gasoline prices are a direct result of climbing oil prices. The price of oil bottomed out in spring 2020 during the Covid-19 crash, but today a barrel of oil fetches almost $130 in the US, with higher prices a direct result of Russia’s invasion of Ukraine—aided by strong consumer demand as the world moves on from Covid-19 and weak supply as the leading oil-producing nations throttle output.

Russia’s War on Ukraine and the Price of Oil

Russia’s war in Ukraine went from a threat to reality in late February, which caused crude oil prices to briefly rise above $100 a barrel before retreating back towards $90. Over the following two weeks, crude oil priced climbed steadily as the US and its western allies imposed crippling sanctions on Russia.

Energy giants such as Shell, BP and Exxon all pulled out of Russian energy deals, while the Biden administration has announced a ban on importing Russian oil and other petroleum products, which represents about 8% of US-bound crude shipments.

“The Russia-Ukraine crisis significantly changed the global oil supply forecasts and this is a key input into how oil is priced globally,” said David Bahnsen, chief investment officer at The Bahnsen Group, a wealth management firm based in Newport Beach, Calif. “The recent speed of oil‘s surge is truly a matter of changing supply and demand dynamics, and not about traders and speculators trying to make a quick profit.”

After a few years of respite, geopolitical risk has re-entered the fray, and markets are sensitive to the latest news of tensions ramping up or slowing down. This situation isn’t going away any time soon.

“Nothing tells me that the supply and demand imbalance and geopolitical risks are going away near term,” said David Petrosinelli, senior trader at InspereX. “It’s a major issue, and people should be concerned.”

The Demand Component of Higher Oil Prices

When the Covid Recession hit the US nearly two years ago, oil prices tanked along with the stock market. As the novel coronavirus spread around the globe, governments rapidly imposed lockdowns in an attempt to protect their citizens. Lockdowns drove economic disruptions, resulting in less energy demand and falling oil prices.

Oil demand came back strong later in 2020 as national governments and central banks pumped trillions of dollars into the global economy to support workers and the unemployed. By early 2021, oil had climbed back to pre-pandemic price levels.

“Oil demand has recovered swiftly over the past year, even with several Covid waves making their way around the world,” reads a Bank of America research note. “In fact, demand in [the last three months of] 2021 was likely within 1 million barrels per day of pre-pandemic levels.”

OPEC Production Cuts Mean Higher Oil Prices

In April 2020, a spat between Russia and Saudi Arabia over proposed output cuts in response to the new Covid-19 pandemic spooked investors, causing the price of oil to fall to historic lows in April 2020.

But that was then. The problem now is that the oil supply hasn’t kept up with recovering demand.

“The quick rebound in consumption caused crude oil and refined product inventories to fall swiftly from record high levels in mid-2020 to multi-year lows in late 2021,” according to the Bank of America note.

That’s why the Biden administration, despite arguing for less fossil fuel consumption overall, has called on the Organization of Petroleum Exporting Countries (OPEC) and its allies to increase oil production.

“The idea that Russia and Saudi Arabia and other major producers are not going to pump more oil so people can have gasoline to get to and from work, for example, is not right,” Biden said at the most recent G-20 meeting.

Saudi Arabia, OPEC’s most important member nation, produced 10.8 million barrels of oil per day in 2020, according to the US Energy Information Administration. That’s down from 12.1 million two years earlier.

OPEC’s plan to throttle back its oil wells, and the commitment to that plan, “will likely maintain upward pressure on prices,” said CFRA chief investment strategist Sam Stovall.

US Oil Production Slow to Respond

In the US, oil producers aren’t in a hurry to expand production.

The US oil rig count is currently at 520, after hitting a low of 295 a year ago,” said Mace McCain, chief investment officer at Texas-based Frost Investment Advisors. “We are still well below the 2014 high of 1,609 rigs operating. The oil majors are reluctant to increase exploratory spending by the big producers, a trend that’s been growing since 2015.”

Why? For one thing, they don’t want to invest heavily on new wells only to see supply increase, prices decline and their profits dwindle.

This was a major theme of the fracking boom that helped propel the US to become the number one global oil-producing nation over the last decade and a half. Many companies went bankrupt as they overextended themselves building out infrastructure, only to see oil and gas prices plummet on greater and greater supply.

Meanwhile, there’s a large push by some of the world’s largest institutional investors, including BlackRock, to steer investment toward companies with low levels of environmental, social and governance (ESG) risk. That’s moved money away from oil and gas producers when those dollars would help increase production.

“Underinvestment because of ESG is one of the confluence of issues causing the price to increase,” Jack McIntyre, a portfolio manager at Brandywine Global, said.

Leave a Comment