MarketsJun 13, 2022
What can investors expect next for record oil prices?
Commodity Outlook
Victor Lei
Discover
Nearly halfway through the year, energy is still the only S&P 500 sector up in 2022. The S&P 500 Energy Sector is up 58% in 2022, and 4 of the 11 main S&P 500 sectors are down over 20%.
1/ Setting the industry up: The industry underinvested in oil production during COVID, and many projects were postponed or canceled.
2/ Stepping on the gas: The Russia/Ukraine war has led to a boycott of Russian oil — removing supply from one of the world’s largest oil exporters.
3/ No help from producers: Oil giants — which are expected to generate more cash than they did in the past two decades — are ignoring The White House’s request to pump more oil.
TLDR: There is a major oil shortage.
This brings us to today’s sky-high crude oil and gas prices, which have taken the U.S. gasoline average price above $5 per gallon.
Last week, OPEC member United Arab Emirates said prices are “nowhere near” peak yet (BBG). As China’s economy recovers, so will its oil consumption.
News of Shanghai potentially going back into lockdown is one of the few announcements bringing down prices, which is not a sustainable way to lower prices. It’s also difficult to see how this could reverse in the short term with the peak summer travel season here for many countries.
At this rate, Brent Oil is well on its way to breaking the 2008 record of $147.50 per barrel.
But oil prices can quickly reverse as fast as they rose. After the 2008 financial crisis, oil prices collapsed by 70% in the following six months. One scenario that will bring prices down is also one that most people won’t like — a recession that destroys demand.
