Will $100 Oil Finally Bring About Demand Destruction?

• Brent hit $90 per barrel last week and plenty of banks and oil majors now believe we will see $100 oil this year.
• If oil does continue to climb, demand growth will likely slow and central banks may hike interest rates more aggressively. 
• Predictions of oil demand destruction at $80 never materialized and gasoline consumption in the U.S. isn’t slowing down, but that may soon change.

Brent hit $90 a barrel last week as geopolitical concerns and a tight market combined to drive oil prices higher. At the start of this week, Brent traded at over $91 and WTI reached $88 per barrel, while major investment banks and forecasters—and even oil majors—say that $100 oil is on the cards later this year.  Lower-than-normal petroleum inventories, including in the United States, a slower-than-expected supply response to high prices, and declining global spare production capacity amid continuously recovering oil demand could push oil prices to triple digits as soon as this summer, several Wall Street banks have said in recent weeks. 

While bulls are enjoying their earlier bets on a rallying oil market, consumers and monetary policymakers worldwide are becoming increasingly wary of high oil prices and higher energy prices in general, which push inflation higher and well above the central banks’ targeted range. 

Monetary policymakers could act faster and more aggressively to tame what appears to have become overheated oil prices in a market that is much tighter than thought just two months ago. At the same time, major oil-importing nations will be struggling with higher crude oil import bills and could renew their calls on OPEC+ to boost production more than originally scheduled. 

The problem with OPEC+ is that few members can increase production as much as their quotas allow, and in the process of doing this, they are reducing the global spare capacity, which becomes more vulnerable to supply shocks and geopolitical concerns, such as the Russia-West standoff over Ukraine. 

Add to this bullish factor the low investment in new supply over the past two years and a slower response to high oil prices from the U.S. shale patch than in previous cycles when prices were rallying, and oil could hit $100 by the end of this year, say Goldman Sachs, Bank of America, JP Morgan, and Morgan Stanley, among others. 

$100 oil could be coming within months, Chevron’s chief executive Mike Wirth told Bloomberg TV last week. 

Still, $100 oil will likely trigger a slowdown in consumption, and energy-intensive industries and central banks could react with more interest rate hikes to tame energy-driven inflation. 

Consumption of gasoline in the United States, for example, has not yet shown signs of slowdown. According to EIA estimates, cited by the AAA,   gasoline demand rose slightly from 8.22 million bpd to 8.51 million bpd in the latest reporting week. This still puts gasoline demand in a typical range for the winter driving season, which was 8.8 million bpd in mid-January 2020. 

Related: Oil Prices On Track For Best January In 30 Years

Additionally, despite the latest rise in crude stocks, the current stock level is around 13 percent lower than in mid-January 2021, contributing to pressure on domestic crude prices, AAA said. 

Due to high oil prices, the national average price rose to $3.363 per gallon of regular gasoline as of Sunday, January 30. That’s just $0.08 below the 2021 peak of $3.44 and well above the $2.422/gal price at this time last year. 

Consumer sentiment in the United States fell in January to the lowest level since November 2011, according to the University of Michigan Surveys of Consumers.

“Although their primary concern is rising inflation and falling real incomes, consumers may misinterpret the Fed’s policy moves to slow the economy as part of the problem rather than part of the solution,” said U-M economist Richard Curtin, director of the surveys.

Considering that high gasoline prices are a primary concern for U.S. consumers, the Biden Administration has a real problem with $90 and $100 oil, especially in view of the midterm elections in November.

If global demand continues to rebound and no fresh lockdowns are imposed, oil prices—and by extension, gasoline prices—will hold at elevated levels until they bring demand destruction, a slowdown in economic growth, or faster-than-planned interest rate hikes.  

By Tsvetana Paraskova for Oilprice.com

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