The Week in Review: January 24, 2022
$100-per-Barrel Oil?
Is oil headed to $100 per barrel? It’s been up 13% since the start of the year, according to MarketWatch. The last time oil was above $100 was in 2014, per the Energy Information Administration (EIA). Note that price trends tend to run for long periods—see Figure 1.
The run-up in price since last year can be blamed on several factors. The reopening of the economy is a welcome event, but it increases the demand for oil, while OPEC and its allies have been slow to boost production.
Global investment in oil production has lagged amid the last decade’s drop in price and the shift toward renewables. U.S. shale production, which had historically been very responsive to prices, has been slow to rebound.
This surprises most folks, but the U.S. accounted for a whopping 20% of total global oil production in 2020, according to the EIA. It is the world’s top oil producer. Saudi Arabia is number 2 at 12%, and Russia is number 3 at 11%.
Finally, oil markets expect little impact from Omicron on the global economy. Rising global tensions have exacerbated this month’s rise in prices, and a story from Bloomberg News last week highlighted dwindling spare capacity as we approach summer.
Figure 2 illustrates the seasonal influences over oil. On average, prices rise into the summer (black line, percent change on the right) and dip in the fall. But note the wild swings in 2020 and 2021 (left side), as the lockdown reduced demand, and the reopening aided demand.
As 2022 begins, oil prices are up sharply (purple line). Historically, prices have averaged a 15% rise by July. We’re almost there and it's still January.
But gasoline has been more muted. The average price of regular gasoline in the U.S. was $3.32 per gallon on January 21, up about a nickel since the beginning of the year, per GasBuddy.com. It remains below the $3.43 peak in early November.
Additionally, gasoline prices are usually stable early in the year, according to the EIA, and U.S. gasoline inventories have jumped over the last two months.
On a favorable note, the EIA’s January 2022 Short-Term Outlook expects global production to slightly outstrip demand in 2022 and 2023. That would be favorable for consumers.
The EIA said it expects oil to average “$75/barrel in 2022 and $68/barrel in 2023. However, oil market balances are subject to significant uncertainties (my emphasis) during the forecast period, notably, the way in which the ongoing pandemic affects economic growth, oil demand, and the production decisions of OPEC+ members. These factors, among others, could keep oil prices volatile.”
Market Action
Last week saw another sell-off, as investors attempt to factor in a Fed that seems more determined this year to rein in inflation. That is to say, the expectation of higher interest rates in 2022 is colliding with overall economic optimism.
Despite the latest pullback, the S&P 500 Index and the Dow have yet to fall 10% from their respective peaks. Realistically, we’re due for such a correction, especially given the steep run-up in stocks since the March 2020 lows. Timing highs and lows, however, has always been an extremely difficult proposition.
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
The unemployment rate in December of 2021 was lower than it was during every month in the 1970s, ’80s, and ’90s. —Morning Brew, January 7, 2022
The Mississippi River is the cleanest it’s been in more than a century, with pollution down to 1% of what it was in the 1980s, while the Thames, once declared dead, is now “home to a myriad of wildlife as diverse as London itself.” —Future Crunch, December 31, 2021
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