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It may sound cynical, but it is somewhat refreshing to see U.S. crude oil prices targeting $100 a barrel due to...genuine fundamentals.
For the uninitiated, in market-speak "fundamentals" are the data that determine the stability of an asset and its value, such as macroeconomic or geopolitical factors, issues of supply and demand – in other words, bona fide, widely accepted drivers of prices.
Too often in the past, oil prices have punched above the $100 handle under murkier circumstances surrounding the global financial crisis, or dropped below zero at the height of the pandemic – or worse, did those things amid a storm of market manipulation allegations, which I have written about.
This time, however, predictions that crude oil prices may soar into the triple digits by the end of the year are tied to concrete data and events: in this case, aggressive oil supply cuts by Saudi Arabia and Russia, which both indicated this month they would be extending through the end of the year – just in time to be a major flashpoint in the 2024 presidential election.
The Saudis released a statement last week vowing to maintain a reduction to oil exports of 1 million barrels a day, while Russia opted to extend a 300,000-barrel-a-day export cut through the end of 2023.
As a frame of reference, this is just a fraction of global oil demand, which is expected to rise to nearly 103 million barrels a day next year, according to the U.S. Energy Information Administration, the statistics arm of the Department of Energy.
But few countries have the wiggle room Saudi Arabia does to sway supply. In fact, it is the only member of the Organization of Petroleum Exporting Countries (OPEC) boasting enough spare crude production capacity to work the levers and keep prices pointed up.
Energy market participants told Power Corridor this week that, barring a "macro surprise" that flips the script, the energy complex is on track to stand firm or climb higher going into the cold-weather months, which will undoubtedly weigh on Biden's reelection bid, especially if retail gasoline – a key driver of consumer sentiment – jumps above $4 a gallon again.
This morning's U.S. Consumer Price Index report showed a larger-than-anticipated uptick in inflation for August, buoyed primarily by scorching energy prices, which continued to rise on the data. Crude oil hovered around 10-month highs Wednesday. Headline inflation rose 0.6 percent last month from July, while inflation climbed 3.7 percent on an annual basis. The average U.S. retail gasoline price clocked in at $3.84 a gallon this week and is poised to head higher.
June 2022 marked the last noteworthy energy spike, when U.S. crude oil leapt above $120 a barrel and the average price for a gallon of unleaded retail gasoline shot above $5 for the first time on record nationally – all of which served as a major headache for the Biden administration, since it was already beleaguered by Americans' immense dissatisfaction with spiraling inflation and rising interest rates.
In a research note last week, Washington-based energy research firm Clearview Energy Partners observed, "Continuing crude price strength could weigh on President Joe Biden's reelection bid." That is probably an understatement. Given that a recent Associated Press poll indicated fewer than one in four Americans want Biden to run again – the exact number was 24 percent – the energy vote alone could be enough to tip the scales.
Some aren't waiting to see what happens. As summer's final days tick down, a wave of commodities traders are already assessing the direction of energy prices as "too rich," according to one market participant who closely watches daily trade flows. "The trading houses that want to go long and don't want to pay the big price tag are expressing it through options, with strike prices for crude oil at $90 to $100 a barrel for December to January," he told Power Corridor.
"Oil prices are on course to end the year between $85 and $100, since the market has been tight and demand is still growing without relief," he said. Locking in oil prices through options has become appealing to many traders.
Ultimately, demand destruction (when high prices effectively cure themselves by spurring a drop in demand), could kick in at around $90 a barrel for crude oil and at or above $4 a gallon for gas at the pump, he says. But until then expect these prices to impact Americans, their wallets and the presidential election.
"Right now, Wall Street is very bullish," he says. "Not many people are selling the market and key drivers of the complex, like the OPEC cuts and strong demand hasn't changed."
If Saudi Arabia and Russia don't reverse their oil supply cuts in 2024, Goldman Sachs recently warned, crude oil prices could shoot above $100 a barrel and hold firm through the end of next year.
One possible silver lining: The Paris-based International Energy Agency, a global energy watchdog, predicted this week that demand for oil, coal and natural gas will peak before 2030. "We are witnessing the beginning of the end of the fossil fuel era," IEA chief Fatih Birol said Tuesday. He added, "It shows that climate policies do work."
