The price of oil is rising – again

I was on holiday last week and as my taxi returned me to Schloss Giga Watt on Saturday, I noticed that fuel prices at the Shell station on the Fulham Palace Road had taken a decent jump during my week in the Austrian Alps. 

A litre of unleaded petrol is currently weighing in at a substantial 149.5p. It hasn’t passed the 150p mark but it surely will over the coming weekend. Much as I may dislike it, our local petrol station is only reflecting what’s going on in international oil markets with prices hitting $90 per barrel earlier in the week and sitting today at just north of $89 per barrel. That’s high by recent standards where oil has sat – more or less happily – at $80 per barrel. Of course, a bit of a jump up or jump down at some point during the year should be no surprise – it happened in both directions last year – but $90 per barrel is an uncomfortable place to be especially if your day job involves worrying about inflation.

So what’s going on? Bank of America analysts increased their forecasts for oil prices yesterday and now believe that the market will peak at around $95 per barrel this summer – during the US’s driving season – before falling back in the autumn to give an overall average for the year of $86 per barrel for Brent crude. On the positive side, analysts put some of this down to “improving economic growth expectations”; on the negative side, some of the increase is down to “geopolitical turmoil” including attacks by Ukraine on Russian energy infrastructure.

Natasha Kaneva at JP Morgan concurs. Last week, she wrote: “At face value, and assuming no policy, supply or demand response, Russia’s actions [in reducing output] could push Brent oil price to $90 already in April, reach mid-$90 by May and close to $100 by September.” 

That would be bad news for all of us but Kaneva and her team think that is where the action will end: “The lesson from the 2022 energy crisis taught us that there are multiple levers that can quite effectively mitigate the impact of the high prices…Our view remains that given the US dollar strength and high borrowing costs, oil prices substantially above $90 can cause severe disruptions in the global oil demand…in turn resulting in lower prices.”

The elephant in the room is, as ever, OPEC+ and what it decides to do. The answer is that the OPEC grouping will be as pragmatic and as self-interested as ever no matter how paradoxical that might seem. Saudi Arabia remains at the core of the cartel and will remain entirely immune to pressure from the US to increase their output. Joe Biden cares more about US consumers than oil company revenues and has consistently been rebuffed by Mohammed Bin Salman every time he has asked Saudi to raise its output. This impunity was demonstrated in the first quarter of this year when OPEC+ under Saudi and Russian influence moved swiftly to make sure that there was no surplus in global oil markets. Consequently, it’s no surprise that as demand increases towards the middle of the year, the oil market is beginning to fall into deficit and this means that oil prices can only go one way.

The good news is that Saudi Arabia and its OPEC+ partners know that Kaneva and her colleagues are right: push the market too hard with oil prices and you’ll simply destroy demand. We may be in a period of economic recovery but there’s nothing like high commodity prices to kill off fiscal optimism. There’s also no need to be greedy because there’s room for everyone to enjoy themselves in this market. After all, the US Energy Information Administration is predicting punchy increases in global oil demand of 1.4 million barrels of oil per day in both 2024 and 2025 which suggests the fabled Peak Oil is still some way off and closer to 2040 than 2030, in my view.

What does all this mean for Reaction readers? From a high starting point petrol is going to get a little bit dearer over the course of the next few months and, alas, the days of sub-150p petrol in Fulham won’t return anytime soon. 

Write to us with your comments to be considered for publication at letters@reaction.life