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

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Bank of America is now predicting that Brent crude oil, which drives gasoline prices, 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 international commodities, instructed CNN.

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

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

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

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

Americans bitter on the economic system

Oil prices 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.

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

Americans pay very shut consideration to prices at the pump and considerations about inflation have helped bitter their views on the total economic system.

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

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So why is Bank of America so bullish on oil?

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

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

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

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If oil will get too sizzling, shoppers may balk at high prices and determine to drive much less, or change to more gas environment friendly automobiles or electrical automobiles.

But Bank of America does not suppose that change will occur anyplace close to the present value 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.”

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US oil corporations aren’t dashing to assist

Not solely is demand robust, provide is additionally lagging.

The United States is producing much less oil than it did earlier than Covid — though prices are a lot increased in the present day.

US oil corporations are beneath 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 an alternative plowing cash into share buybacks and dividends.

Despite the 67% spike in oil prices this yr, 50 of the largest oil corporations have elevated their annual budgets by a mere 1% relative to their preliminary plans, in accordance 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, to date. ExxonMobil (XOM), Chevron (CVX) and different US oil corporations reported blockbuster quarterly leads to current days.

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

OPEC is sticking to its weapons

Despite pleas from the White House, OPEC and its allies have to date refused to considerably improve provide.

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

He pointed to the undeniable fact that the breakeven value for oil in lots of OPEC nations’ budgets is between $70 and $75 a barrel — that means they are 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 means 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 international commodity technique at RBC Capital Markets, wrote to shoppers 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 hearth again at OPEC+ by unleashing oil stockpiled in 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 advised tapping the SPR was beneath lively 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,” decreasing 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, reminiscent of 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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