Gas prices are sky high and Bank of America warns $120-a-barrel oil is on the way

Bank of America is now predicting that Brent crude oil, which drives fuel costs, will zoom to $120 a barrel by June 2022. That’s 45% increased than present ranges.

“It’s very easy for prices to shoot up when demand conditions are tight like they are now,” Francisco Blanch, Bank of America’s head of world commodities, advised CNN.

Blanch has been an outspoken oil bull, predicting in June that crude would finally surge to $100 a barrel.

“Back then, people thought we were crazy. Now, here we are,” Blanch stated. “We are generally still quite bullish.”

Others are rather more cautious.

Pierre Breber, the chief monetary officer at Chevron (CVX), advised CNN final week that oil costs are unlikely to remain elevated for lengthy.

“This feels more cyclical than structural,” Breber stated.

Americans bitter on the financial system

Oil costs backed off from current highs on Wednesday. US crude tumbled 3% to round $81 a barrel and Brent misplaced 2% to $83 amid jitters forward of Thursday’s OPEC assembly.

An additional oil spike would elevate the already-elevated price of dwelling for Americans. And it will squeeze companies grappling with sticker shock, shortages and provide chain disasters.

Americans pay very shut consideration to costs on the pump and considerations about inflation have helped bitter their views on the general financial system.

Nearly two-thirds of Americans described the financial system as poor in a ballot launched this week. In Virginia, the place Republicans received a key prize within the state’s governor’s mansion, the financial system ranked in exit polls as an important subject, surpassing schooling, taxes and Covid.

Demand for power is rising sharply

So why is Bank of America so bullish on oil?

First, it is as a result of demand continues to get better swiftly from the pandemic, particularly for gasoline as shoppers drive extra.

Demand is getting an extra enhance from skyrocketing pure fuel costs. US pure fuel has greater than doubled this 12 months and not too long ago hit the equal price of $240-a-barrel oil in Europe. High pure fuel costs will power some utilities and factories to modify to a comparatively cheaper different: oil.

“That is paving the way to an even tighter market,” Blanch stated.

If oil will get too scorching, shoppers might balk at excessive costs and resolve to drive much less, or swap to extra gasoline environment friendly vehicles or electrical autos.

But Bank of America would not assume that change will occur wherever close to the present worth ranges.

“This demand recovery isn’t going to break at $80, $90 or even $100 a barrel. Remember, everything else has gone up,” Blanch stated, pointing to surging inflation. “I know $100 sounds expensive but it ain’t that expensive in the context of things.”

US oil firms aren’t speeding to assist

Not solely is demand robust, provide can also be lagging.

The United States is producing much less oil than it did earlier than Covid — although costs are a lot increased as we speak.

US oil firms are underneath monumental strain from Wall Street to indicate self-discipline after a few years of overspending on costly drilling initiatives. They have heard that message loud and clear and are as a substitute plowing cash into share buybacks and dividends.

Despite the 67% spike in oil costs this 12 months, 50 of the most important oil firms have elevated their annual budgets by a mere 1% relative to their preliminary plans, in line with a Raymond James evaluation.

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“We are beyond capital discipline. We are in capital austerity,” stated Pavel Molchanov, an analyst at Raymond James.

That technique has paid off, up to now. ExxonMobil (XOM), Chevron (CVX) and different US oil firms reported blockbuster quarterly outcomes in current days.

Oil firms are additionally reluctant to ramp up manufacturing as a result of the demand outlook stays very unsure given the local weather considerations all over the world. Eventually, oil demand is predicted to peak, however nobody is aware of exactly when and at what degree.

OPEC is sticking to its weapons

Despite pleas from the White House, OPEC and its allies have up to now refused to considerably enhance provide.

“OPEC is not going to accelerate. They like their plan. They think their plan is working,” Blanch stated.

He pointed to the truth that the breakeven worth for oil in lots of OPEC nations’ budgets is between $70 and $75 a barrel — that means they’re solely now simply breaking even.

“OPEC is not interested in pushing prices back down to $60 a barrel. They have zero interest,” Blanch stated.

There’s additionally some skepticism about whether or not OPEC+ actually has the power to sharply ramp up manufacturing after years of slower funding.

There’s a “real question mark about which countries can really add more barrels at this point,” Helima Croft, head of world commodity technique at RBC Capital Markets, wrote to purchasers in a observe Monday. Croft pointed to how OPEC+ has “underdelivered” on its deliberate output hikes for a number of months in a row.

Will the White House faucet the SPR?

All of this has led to hypothesis that President Joe Biden will fireplace again at OPEC+ by unleashing oil stockpiled within the Strategic Petroleum Reserve.

“We think the Biden administration is prepared to release crude” from the SPR to “cap prices and induce the producing countries to put more barrels on the market,” Croft wrote. “A US SPR release could indeed be done in coordination with other consuming countries for a maximum impact effect.”

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Last month, Energy Secretary Jennifer Granholm instructed tapping the SPR was underneath energetic consideration — earlier than the Energy Department later walked again her feedback by clarifying there was no “immediate plan” to take action.

Goldman Sachs has stated an SPR launch would solely be of “modest help,” reducing the financial institution’s year-end forecast for Brent by simply $3 a barrel.

Bank of America is skeptical, too.

“It will have a minor impact on prices, unless they do a massive, massive release,” Blanch stated. “It won’t kill the rally.”

Blanch additionally questioned the rationale for tapping the SPR now. Normally, this stockpile has been reserved for break-the-glass moments, equivalent to wars and hurricanes.

“The SPR is there for emergencies and negative supply shocks,” Blanch stated. “You don’t release SPR oil because demand is going up since you printed a lot of money and gave it to people.”


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