Russia’s invasion of Ukraine sent energy markets into a tizzy late last month. Most people felt the pinch at pump as gasoline prices soared.
But it looks like the wallet-emptying energy price surge could be over sooner than many think. At least that’s what the futures markets and some basic economics seem to suggest.
The price of Brent crude surged to $114.70 a barrel recently, up 29% since the beginning of February, largely driven by the war in Ukraine. Likewise gasoline prices have jumped to an average of $4.25 a gallon recently from 3.61 a month ago reflecting the higher oil costs.
However, there are things going on under the surface that indicate relief is in sight for cash-strapped consumers. First, oil prices are far down from their highs which climbed near to $130 during the first days of the war. The lower crude prices should quickly filter through to lower auto fuel prices in relatively short order.
Second, the futures markets seem to be pricing in consistent declines through year end, which means prices of gas should continue to drop. September-dated Brent futures contracts were recently changing hands for $107 a barrel, while those dated December were trading at just above $100.
There’s more good news. The economics of oil extraction means the world will likely see a jump in production.
“Virtually every barrel that can be brought to the surface is profitable at $100, so producers are working overtime to maximize output,” states a recent report from the Bullseye Brief financial newsletter. Increasing levels of production should help fill the supply gap which is estimated at up to five million barrels caused when much fo the world sanctioned Russia’s exports, the report continues.
It’s worth taking the author of Bullseye Brief, Adam Johnson, seriously. He’s a former professional oil trader.
On top of that OPEC (the Organization of Petroleum Exporting Countries) oil cartel may decide to approve increases in crude production shortly. While there is some discontent among key member states, there will also be pressure from the U.S. on OPEC’s largest producer Saudi Arabia. The latter has historically had a close relationship with America. Exactly how that plays out remains to be seem. However, the good news appears to be that there is no talk of OPEC cutting production quotas which means the supply situation hopefully won’t deteriorate.
