What’s Behind Rising Fuel Prices?
February 19, 2022
Written By Tim Danze
The energy markets have been on a tear to the upside recently. Prices have recovered over 50 percent from the pandemic lows, and it seems nothing, not even the latest COVID-19 variant, can derail the momentum.
Energy analysts and companies are trying to figure out the current supply situation as we move forward in the first quarter of 2022. There is no shortage of opinions about where prices may go, which keeps the markets active. For every bullish trader looking to buy, there is a bearish one wanting to sell. Around and around the markets go.
Inventories Lower Than Average
As of Jan. 14, total crude stocks sit at 413.813 million barrels. Last January, there were 486.563 million barrels, a 72.750-million-barrel difference. Strong demand could create issues, so the market continues to look for more production.
Total gasoline stocks as of Jan. 14 sit at 246.621 million barrels. Last year, there were 245.217 million barrels or 1.404 million barrels fewer. For the same time frame, distillates sit at 127.952 million barrels, down 35.710 million barrels from the prior year. The lower-than-average gasoline and diesel inventories are a crucial driver of the recent price movement. The positive outlook for continued economic recovery and the tight supply situation could create challenges and further support prices.
OPEC+, a grouping of the Organization of the Petroleum Exporting Countries (OPEC) and allies led by Russia, has been increasing production by 400,000 barrels per day for each of the last several months as the world recovers from the pandemic. OPEC+ said the market needs more barrels because demand will increase and outpace supplies.
U.S. Production Down
The pandemic has slowed oil output, and U.S.-based companies are unlikely to ramp up production. Domestic shale oil producers were punished during the pandemic as their investors grew dissatisfied with the lack of returns and are now taking a disciplined approach. Oil companies cut back on capital expenditures when the pandemic hit, communities locked down and demand disappeared. Their thinking: Why spend money looking for more crude oil or drilling new wells when there is no demand and low prices? As economies recover and demand has risen, energy companies are behind in drilling. Production growth is forecast to be flat to slightly higher for 2022, but as West Texas Intermediate crude oil prices surge past $80 per barrel, it will be harder for shale producers to sit on their hands.
Speculators and funds that invest in energy for reasons that have nothing to do with supply and demand also influence pricing. With many big investment banks issuing rosy outlooks for 2022 and rising inflation, these funds have been getting into commodities to try to profit from higher prices and hedge against inflation. These types of traders can push the market to levels higher or lower than many think are reasonable. My guess is these institutional investors are a driving force behind the recent explosion in futures prices. The market cannot sustain price action like this forever, but as mentioned above, it can do it longer than what we may think is reasonable.
Historically, prices can see a bit of a pullback in late February or early March that could offer some opportunities to buy fixed-price gallons for the late spring and fall. There are no guarantees, and this market could just keep going up and up as it continues to recover from the pandemic.
The Federal Reserve has indicated it will begin to scale back its asset purchases and raise interest rates. Rising interest rates will influence the markets and could lead to a price correction if one has not already taken place before that time. If the Fed is not pumping as much money into the economy, it would seem to make sense that the U.S. dollar should rally. A rallying dollar is bearish for energy prices.
The one constant is change, and the fact is that volatility will continue to be high as we move into 2022. The adage that the best cure for high prices is high prices may come true yet again.