Oil prices have been steadily climbing since the summer months, driven by a persistent supply crunch, prompting traders on Wall Street to question just how high crude oil can soar before it starts to dent consumer demand. On Tuesday, the West Texas Intermediate (WTI) crude oil breached the $92 per barrel mark, while Brent crude futures surged above $95 per barrel, sending shockwaves throughout the global energy market.
Andy Lipow, President of Lipow Oil Associates asserted, “I think you need to see crude oil prices at $100 to $110 per barrel with gasoline prices rising to $4.00 to $4.25 per gallon to have the consumer change their driving habits resulting in demand destruction.”
Gasoline prices, mirroring the uptrend in crude oil, have lingered around their 2023 highs, with a national average of $3.88 per gallon, as reported by AAA. Tom Kloza, the Global Head of Energy Analysis at OPIS, commented on the situation, saying, “Right now gasoline prices throughout the country are pricing in vast imperfections in supply and perfection in demand.”
The surge in energy prices traces its roots back to late June, primarily due to crude output cuts imposed by some of the world’s largest oil producers within the OPEC+ alliance, coupled with unilateral reductions from Saudi Arabia. These actions have collectively propelled crude futures up by approximately 30% over the past three months.
Ed Morse, Global Head of Commodities Research at Citi, suggested that oil could reach the coveted $100 per barrel threshold and potentially remain there for a “short while.” However, he also cautioned that there would inevitably be a pullback, as increased supply from countries such as the United States, Canada, Brazil, Iran, and Venezuela gradually makes its way into the market.
Jay Hatfield, CEO at Infrastructure Capital Management, echoed this sentiment, stating, “It is entirely possible that WTI crude trades above $100 before supply and demand factors overwhelm momentum.” Hatfield further emphasized, “We do believe that there will be substantial demand destruction at [WTI] prices above $95 per barrel, which will drive the commodity back into our fair value range.”
The relentless ascent of oil prices is raising alarm bells regarding its potential impact on the broader economy, particularly at a time when the Federal Reserve is diligently attempting to curb inflation. While Federal Reserve officials are widely anticipated to maintain interest rates during their upcoming meeting at the end of the week, they are likely to leave the door ajar for one more rate hike this year.
Energy prices, notably gasoline, were the primary culprits behind August’s hotter-than-expected Consumer Price Index (CPI) reading, amplifying concerns of inflationary pressures. The exact threshold at which oil prices begin to adversely affect the economy remains uncertain, but traders and policymakers are closely monitoring the trajectory of crude and gasoline prices as the global oil market grapples with persistent supply constraints.
In conclusion, the relentless surge in oil prices has triggered a wave of apprehension, as analysts and traders closely monitor its potential impact on consumer demand. The delicate balance between supply and demand in the global energy market remains a critical factor in determining the trajectory of both oil prices and economic recovery. As prices continue their ascent, the resilience of consumer demand will undoubtedly play a pivotal role in shaping the path forward.
Source: Source: Yahoo Finance
