Gasoline prices are through the roof and Bank of America warns that $ 120 a barrel oil is on the way

Bank of America now predicts that Brent crude oil, which drives gas prices, will skyrocket to $ 120 a barrel by June 2022. That’s 45% higher than current levels.

“It’s very easy for prices to skyrocket when demand conditions are as tight as they are now,” Francisco Blanch, Bank of America director of global commodities, told CNN.

Blanch has been a bullish on outspoken oil, forecasting in June that crude would eventually rise to $ 100 a barrel.

“Back then, people thought we were crazy. Now, here we are,” Blanch said. “Overall, we remain quite optimistic.”

Others are much more cautious.

Pierre Breber, CFO of Chevron (CLC), told CNN last week that Oil prices are unlikely to stay high for long.

“This feels more cyclical than structural,” Breber said.

Americans are bitter about the economy

Oil prices fell from recent highs on Wednesday. US crude fell 3% to around $ 81 a barrel and Brent lost 2% to $ 83 amid jitters ahead of Thursday’s OPEC meeting.

A new oil spike would raise the already high cost of living for Americans. And it would squeeze out companies struggling with the impact of labels, shortages, and supply chain disasters.

Americans pay close attention to pump prices, and concerns about inflation have contributed to embittering their views on the broader economy.

Almost two-thirds of Americans described the economy as poor in a poll published this week. In Virginia, where Republicans won a key award in the state governor’s mansion, the the economy ranked in exit polls as the most important topic, beating education, taxes and Covid.

Energy demand is increasing dramatically

So why is Bank of America so bullish on oil?

First, it’s because demand continues to rebound rapidly from the pandemic, especially for gasoline as consumers drive more.

Demand is getting a new boost from natural gas prices skyrocketed. US natural gas has more than doubled this year and recently cost the equivalent of $ 240 a barrel of oil in Europe. High natural gas prices will force some utilities and factories to switch to a relatively cheaper alternative: oil.

“That is paving the way to an even tighter market,” Blanch said.

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If oil gets too hot, consumers could resist high prices and decide to drive less or switch to more fuel-efficient cars or electric vehicles.

But Bank of America does not believe the change will occur near current price levels.

“This recovery in demand will not break down to $ 80, 90 or even $ 100 a barrel. Remember, everything else is up,” Blanch said, pointing to rising inflation. “I know $ 100 sounds expensive, but it’s not that expensive in the context of things.”

American oil companies are not rushing to help

Not only is demand strong, supply is lagging as well.

The United States is producing less oil than before Covid, although prices are much higher today.

American oil companies are under enormous pressure from Wall Street to show discipline after many years of overspending on expensive drilling projects. They’ve heard that message loud and clear and are instead investing money in stock buybacks and dividends.

Despite the 67% increase in oil prices this year, 50 of the largest oil companies have increased their annual budgets by a mere 1% relative to their initial plans, according to an analysis by Raymond James.

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“We are beyond the discipline of capital. We are in the austerity of capital,” said Pavel Molchanov, an analyst at Raymond James.

That strategy has paid off, so far. ExxonMobil (XOM), Chevron (CLC) and other US oil companies. reported highly successful quarterly results In recent days.

Oil companies are also reluctant to increase production because the demand outlook remains highly uncertain given climate concerns around the world. Over time, oil demand is expected to peak, but no one knows precisely when or at what level.

OPEC stands firm

Despite pleas from the White House, OPEC and its allies have so far refused to significantly increase the supply.

“OPEC is not going to speed up. They like their plan. They think their plan is working,” Blanch said.

He pointed to the fact that the equilibrium price of oil in the budgets of many OPEC nations is between $ 70 and $ 75 a barrel, which means that they are only now breaking even.

“OPEC is not interested in lowering prices to $ 60 a barrel. They are not interested,” Blanch said.

There is also some skepticism about whether OPEC + really has the ability to dramatically increase production after years of slower investment.

There is a “real question mark as to which countries can really add more barrels right now,” Helima Croft, head of global commodities strategy at RBC Capital Markets, wrote to her clients in a note on Monday. Croft pointed out how OPEC + has “underperformed” its planned production increases for several months in a row.

Will the White House take advantage of the SPR?

All of this has led to speculation that President Joe Biden will answer to OPEC + for unleashing the oil stored in the Strategic Petroleum Reserve.

“We believe the Biden administration is prepared to release crude” from the SPR to “cap prices and induce producing countries to put more barrels on the market,” Croft wrote. “A US SPR launch could be done in coordination with other consuming countries for maximum impact effect.”

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Last month, Energy Secretary Jennifer Granholm suggested that the possibility of taking advantage of the SPR was being actively considered – before the Department of Energy later retracted its comments clarifying that there was no “immediate plan” to do so.

Goldman Sachs has said that an SPR release would only be of “modest help,” lowering the bank’s year-end forecast for Brent by just $ 3 a barrel.

Bank of America is also skeptical.

“It will have less of an impact on prices, unless they do a massive launch,” Blanch said. “It will not end the rally.”

Blanch also questioned the justification for taking advantage of the SPR now. Typically, this reserve has been reserved for times of glass breakage, such as wars and hurricanes.

“The SPR is there for emergencies and negative supply shocks,” Blanch said. “SPR oil is not released because the demand is increasing since it printed a lot of money and gave it to people.”

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