Here’s How Your Gas Can Hit $5 A Gallon – CBS Baltimore

(CNN) – NS oil price increase This year has angered motorists, polluted Americans’ views of the economy, and made both The White House and Federal Reserve. Unfortunately, JPMorgan Chase says the oil spike has only just begun.

In a new report on Monday, JPMorgan warned clients that Brent crude will hit $125 a barrel next year and $150 in 2023, largely because OPEC doesn’t have the strength to deal with the crisis. The price is as high as many people think.

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“They don’t have crates. It’s an illusion,” Christian Malek, head of oil and gas research at JPMorgan and lead author of the new report, told CNN in a phone interview.

The $150 oil price is more than double the Brent oil price today at around $73.50. If that forecast is correct, it could potentially lead to national gas prices peaking at $5 a gallon and certainly exacerbate the inflationary pressures exerted on the US economy and squeeze American family.

The central problem, Malek said, is that while the OPEC nations have plenty of oil in the ground, they don’t have the capital and logistics to deliver the oil quickly.

OPEC’s actual spare capacity, a closely watched metric that measures how quickly barrels can be added to the market, stands at just 2 million barrels per day next year, JPMorgan estimates. That’s less than half what many on Wall Street assume.

OPEC spare capacity is equivalent to only 4% of total capacity, down from the 14% average between 1995 and 2020 and well below the 10% amenity level, JPMorgan said. When this buffer zone gets unusually low, oil prices can spike and investors apply a premium to the price.

“Let’s look back at history. When we’re in a scenario where the market goes, ‘Oh, too bad, we don’t have the spare,’ that’s where you’re going to see spikes,” Malek said.

The fear in those situations is that the oil market needs only one shock (war, natural disaster, or other supply disruption) to be unable to meet demand.

Omicron sent working oil

More importantly, JPMorgan doesn’t call for oil prices to trade at $125 per barrel for all of 2022. Instead, the bank predicts crude prices will average $88 next year and “overshoot” upwards. $125 at some point. Likewise, JPMorgan sees Brent averaging $82 in 2023 but exceeding $150.

However, the timing of the call is somewhat curious.

Oil prices tumbled on Friday on fears that the Omicron variant would deal a blow to surging energy demand by eating into the number of people driving and flying. Crude oil rebounded on Monday, though it remained below recent highs.

But Malek explains that he’s been working on this analysis for months, and the forecast hasn’t been changed by Omicron. That’s because if the new coronavirus variant reduces demand, OPEC will likely offset it by cutting demand.

Malek said of OPEC: “They will find excuses to let off steam.

OPEC and its allies will meet on Thursday and must decide whether to push ahead with a plan to supply an additional 400,000 bpd despite Omicron concerns and a US-led intervention to free up supplies. strategic storage or not. In the wake of Omicron, the White House urged OPEC+ to stick to its plan to gradually increase supply.

$150 oil will convert to $5 gas

Veteran energy analyst Tom Kloza, president of the Oil Price Information Service, said a $150 price of oil would be equivalent to $5 a gallon of gasoline nationally.

And that doesn’t include the impact of more states joining California and Oregon in imposing carbon costs to reduce emissions.

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Pump prices are inherently a sore point for consumers. The national average now stands at $3.39 a gallon, up from $2.13 a year ago, according to AAA.

JPMorgan said world oil producers, including OPEC, have failed to raise the capital needed to raise output enough to meet demand. The Wall Street Bank estimates there is a $750 billion gap in global oil capital spending, asking for oil prices to rise to $80 to incentivize further investment.

“We took the availability of oil for granted,” Malek said.

Don’t invest to please Wall Street

But why don’t countries and companies invest? Malek points to a number of factors.

First, OPEC countries reduced spending when Covid broke out and required large investments in economic and public health measures.

“Covid-19 has wiped out investment. These countries had to fend for themselves financially. Malek said.

That’s why Malek writes that OPEC will “struggle” to increase output next year, even if it pauses production increases in early 2022.

Second, Wall Street investors have asked oil companies to stop spending all of their cash flows on costly drilling projects. Drillers are being encouraged to live within their means and return more cash to shareholders through dividends and buybacks.

“To do that, you have to invest less. You can either put the money in the ground or return it to the shareholders. If you do it the following way, you’re investing,” Malek said, adding that he calls this the “black premium” built into energy prices.

And then there’s the energy transition. Under pressure from shareholders, governments and society at large, oil companies are spending money to reduce emissions and build low-carbon businesses. Such is the case in Europe, where BP, Shell and other major players have promised to cut emissions and invest heavily in electric charging and renewable energy.

“We didn’t use to have conversion costs. Now we do,” Malek said.

Calling for $200 Oil Was Wrong in 2008

Of course, JPMorgan’s call for $150 oil is a bit of an exception.

The Energy Information Administration expects Brent crude to fall to an annual average of $72 per barrel next year as production increases from OPEC+, US shale and other non-OPEC countries.

Kloza, a veteran energy analyst, is skeptical of JPMorgan’s forecast.

“It reminds me of when we hit $145/barrel in July 2008 and some banks predicted $200 by the end of the year,” Kloza said in an email to CNN, “just seeing the Lehman article Brothers financial collapse pushed the price instead of $30. ”

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