High oil prices and runaway inflation will eventually curb demand — and possibly lead to a recession — but energy consumers haven’t gotten there yet, analysts said.
The Energy Department last week reported that demand for all petroleum products rose 4 percent from the same period a year earlier, driven by consumption of jet fuel as American resume traveling with a vengeance.
With demand holding up and supplies still scarce, expect prices of oil and other commodities to stay higher for longer, said. Paul Hickin, associate director for oil at S&P Global Commodity Insights.
“The market is being swept up by the bullish momentum on the oil products side, with jet fuel, diesel and gasoline prices all close to or at record levels amid tight stocks.” he said. “Strong seasonal European and U.S. demand is likely to persist throughout the summer.”
The price for West Texas Intermediate, the U.S. benchmark, increased by 1.5 percent last week to settle Friday at $120.67 per barrel.
Meanwhile, the war in Ukraine continues to upend global trade. Increasingly blocked from Western markets, Russia is selling crude at deep discounts to its Asian customers. Much of Europe, meanwhile, is searching for replacements as it works to end its dependency on Russian crude.
“We are at the beginning of an epochal change in oil trade flows, with the vast majority of Russia’s oil being redirected from Europe to Asia,’ said Claudio Galimberti, a senior vice president of analysis at Norwegian consultancy Rystad Energy. “In turn, the Middle East is becoming again a major supplier of oil to Europe.”
But Middle East producers are either unable, as in the case of Libya, or unwilling to put much more oil on the market. U.S. crude is filling some of the void, and Venezuela is getting back into the game, but markets will remain tight so long as major producers such as Russia and Iran are under Western sanctions.
Rising energy costs and broader inflation are already taking a toll on the broader economy. OPEC last month lowered its forecast for world economic growth to 3.5 percent from 3.9 percent, down from 5.8 percent in 2021.
The U.S. economy shrunk about 1.5 percent in the first quarter, and financial markets are in retreat as investors prepare for sharply higher interest rates as the Federal Reserve moves aggressively to bring inflation under control.
After the Labor Department reported Friday that inflation is nearing 9 percent — a 40-year high — some analysts speculated that a three-quarter point increase in the Fed’s benchmark rate is on the table when policy makers meet this week. Such an increase would border on economic shock therapy, and only add to concerns that sharply rising rates in an economy sustained by easy money for more than a decade will spur a recession.
“It all feels bubble-ish,” said Al Salazar, a managing director at energy data firm Enverus. “I’m not sure what pin pops that bubble, or how big the bubble is.”
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