A large number of economists are putting the magnifying glass on a sector that, for many, was forgotten: energy and, more specifically, oil. The evolution of inflation and the possibility of achieving the inflation objective by central banks at the 2% threshold in the long term depend largely on black gold. The raw material par excellence took a break in 2023, but now the noise is returning as to whether it will rebound much more strongly in the coming months.
The barrel of Brent crude oil has gone from trading at the bottom of 72 dollars in the last year, to climbing to 88 dollars in the markets. What is the context and what price range can be considered in the current context? JP Morgan has prepared a detailed report on the situation of the merchandise and its derivatives, focusing on other moments in the past to extrapolate them to the current environment.
For example, the American bank comments that the strong economic expansion of the 2000s, driven by China’s entry into the World Trade Organization in December 2001, required a lot of oil to grow, which in turn destroyed a strong GDP growth and a rise in oil prices.
“On the contrary, a negative shock to oil supply that raises prices and reduces the purchasing power of consumers will weigh on economic growth and depress oil demand,” explains the bank, bringing that example to the present.
The 1973 Arab oil embargo, the 1978-79 Iranian revolution, the 1990 Gulf War, and the 2022 Russian invasion of Ukraine are examples of supply-driven oil price increases. The speed of price movement also matters. “A sharp and rapid rise in the price of oil will have a greater effect on household confidence and spending, as consumers have less time to adapt,” he says.
For JP Morgan, economies can withstand oil increases, as long as they are temporary, demand-driven and not combined with other indirect effects, such as monetary tightening, credit quality and financial instability. “Our optimistic outlook on demand and limited OPEC+ production (before Russia’s announcement) should see Brent hit $90 in May and average $85 in the second half of 24 months, a price rise. . Comfortable for both producers and consumers,” he analyzes.
“Nevertheless, Russia’s decision to intensify its production cut could take the price of Brent to $90 as early as April, from mid-$90 in May to $100 in September, the US banking firm warns. This acceleration in prices could be amplified by the possibility that the OPEC+ alliance extends the voluntary reduction in production until the end of the year. “The resulting price increase would occur on the supply side, with negative consequences for demand,” in his opinion.
The impact on gasoline to diesel
JP Morgan argues that, given the strength of the US dollar and high borrowing costs, oil prices well above $90 can cause serious disruptions to global oil demand, as occurred in March-June 2022 and in September-October 2023. “This in turn would translate into a decrease in prices,” describe the experts from the North American bank.
In addition, the 18% rise in oil prices since they bottomed in mid-December has sent prices at the pump soaring. In the United States, the national average price of gasoline reached $3.53 a gallon in March, up more than 15% from mid-December and 9 cents above the level a year ago. National diesel prices in the country reached $4.03 per gallon in recent months, which represents an increase of 3.1% so far in 2024.
In real terms, both gasoline and diesel prices in the United States remain well below their June 2008 highs of $5.74 and $6.64 per gallon, respectively.
Similarly, fuel prices consistently remained at or above current levels between 1979 and 1981 and 2011 and 2014. “But even if the prices of petroleum products have historically been much higher over a On an inflation-adjusted basis, consumers are unlikely to base their current spending decisions on what they paid for fuel 10 or 15 years ago,” says JP Morgan.
The impact of fuel costs
Decisions about work and commuting, flying on vacation and purchasing vehicles are made based on the latest prices. In other words, consumer behavior tends to be quite shortsighted.
At almost $3.53 a gallon for gasoline, an American driving an average of 13,489 miles in a vehicle with an average consumption in 2022 of 23 miles per gallon would spend $2,070 per year, or about $172 per month. The costs multiply for families with lower incomes, especially those in rural areas, as they have less efficient vehicles and travel longer distances to work.
“For an American worker in the first income quartile, who earns about $740 a week, 5.4% of income would be spent today on filling the tank, assuming a car with a medium efficiency index,” the analysts at JP Morgan. That would be almost the same as what was spent last year, but more than the 4% that will be used in 2021.
Although current fuel prices may not approach the consumer pain threshold seen in 2022, there are preliminary signs that consumers may already be reducing fuel consumption, according to JP Morgan.
Gasoline demand in the United States grew by 93,000 barrels per day in January, largely as a result of the year-on-year drop in gasoline prices. This was followed by a year-on-year contraction of 150,000 barrels per day in February and a meager expansion of 15,000 barrels so far in March.
Weekly trips taken by American drivers reveal that trips between 3 and 100 miles have been on a downward trend since late January, coinciding with the period when gasoline prices in the country began to rise.
American cars alone consume 30% of all the world’s gasoline and 9% of the world’s oil, so the trajectory of gasoline demand in the United States is one of the most important parameters in determining the direction of both the world demand for oil and the world prices of this raw material.
“Of course, the lesson of the 2022 energy crisis taught us that there are multiple levers that can quite effectively mitigate the impact of high prices… The most obvious rebalancing mechanism in the short term is the political response in the form of reduction of oil reserves,” they say from the entity.
“Although it has decreased, the reserve still contains enough crude oil to protect the country’s strategic needs and provide a cushion against price shocks: we estimate that the US administration has room to release up to 60 million barrels of crude oil, which would represent a increase in supply of 0.5 mbd per month if it were spread over four months,” he elaborates.
His view remains that, given the strength of the US dollar and high borrowing costs, oil prices substantially above $90 may cause serious disruptions to global oil demand, which in turn would result in a decline in prices.
