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Are Oil Prices Heading for Another Spike?

February 3, 2018

Pipeline moves crude oil from Prudhoe BayJoe Sohm/Visions of America/UIG via Getty Images

Are Oil Prices Heading for Another Spike?

The decline in the dollar’s exchange rate seems to have gathered momentum, in part because the person who has his signature on US currency, Treasury Secretary Steve Mnuchin, seems unperturbed by its weakness. If it continues, will energy costs spiral upward?

CAMBRIDGE – The price at the pump for premium gasoline topped $3 per gallon in much of the United States over the past few weeks, which is surprising to consumers but not to analysts of the world’s oil markets. From its local low two years ago, the price of oil has more than doubled. As with any market, where you stand on this price increase depends on where you sit.

Higher oil prices buttress the fortunes of producers abroad and at home. The International Monetary Fund upgraded the GDP growth outlook of all six of the top ten oil producers that were shown separately in its 2018 forecast update, and the projected growth of world trade volumes was raised half a percentage point this year and next. Increased oil revenues improve the fiscal positions of most producing economies, and some have taken advantage of global investors’ hardier appetite to issue sovereign debt.

In the US, the five states with the largest gains in oil production this decade recorded employment growth of 2.75% in 2017, double the national average. Meanwhile, the number of oil rigs nationwide increased by roughly 50%.

At the same time, a doubling of energy costs takes a significant bite out of US households’ budgets, with energy costs directly accounting for about 6.5% of consumer spending. Even more problematic, this is a regressive tax, disproportionately draining lower-income households’ discretionary spending power.

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Is An Oil Price Spike Imminent?

September 15, 2017

Is An Oil Price Spike Imminent?

Corpus Christi

As the U.S. market begins its recovery from the double whammy served up by hurricanes Harvey and Irma, my earlier projections of where crude oil prices are headed have come true.

Just a little quicker than anticipated.

As I am writing this, WTI (West Texas Intermediate, the benchmark crude rate for futures contracts written in New York) has moved above $50 a barrel for the first time in over five weeks.

In fact, it’s up 6.1 percent in barely three days. Meanwhile, Brent (the equivalent and more globally used benchmark set daily in London) is approaching $56.

Two months ago, I said WTI would be at $52-$54 and Brent at $55-$57 by the end of September. Currently, WTI is within $2 a barrel of its predicted range and Brent has already reached it.

What’s interesting is the fact that this rise is taking place while much of the Gulf Coast refinery infrastructure either remains offline or is running at partial capacity.

After all, refiners form the bulk of crude end users. A reduction in refinery flow rates usually cuts into crude demand and, thereby, pushes prices down.

Despite that, oil prices are going up this morning. There are three reasons for this…

Ignore the News – Oil Demand is Rising

First, the crude oil balance we’ve talked about for some time has been coming in quicker than anticipated. That’s the case even with the rising U.S. production levels.

But remember, oil prices are set by global developments, not (primarily) by what happens in North America or Western Europe.

Both the International Energy Agency (IEA) in Paris and the U.S. Energy Information Administration (EIA) have recently reported that the balance between supply and demand should be realized in the first quarter of 2018. That is much earlier than previously forecasted.

 

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