The price of oil and natural gas rose sharply in the past week, with both commodities continuing to rally on supply shortages.
The oil price chart is a graph that shows the movement of oil prices over time.
Oil prices have been rising for a long time, but other industrial commodities have lagged behind, reflecting expectations that energy supply constraints would balance any global economic downturn.
Early Monday, U.S. crude climbed more than 2% to a seven-year high of $81.50 a barrel, extending its year-to-date gain to more than 120 percent since the end of October. If the rally holds, it would be the first time the US oil benchmark closes over $80 a barrel since October 2014, when the shale revolution triggered a multiyear decline in fossil-fuel prices.
According to Dow Jones Market Data, oil is on course to outperform copper this year by the most since 2002, and is leading a raw materials index by the greatest margin in more than a decade. Natural gas, like oil, is outperforming other commodities.
Copper prices are roughly 10% lower than they were in May, while rises in other metals like zinc and lead have essentially stopped.
Fears of slowing development in China, the world’s top commodities consumer and oil importer, have caused certain industrial metals to decline. Traders believe that the economic impact from China Evergrande Group’s imminent bankruptcy would amplify the slowdown caused by the Delta form of the coronavirus. Because the Chinese economy relies largely on real-estate developers for development and employment, this is the case.
Crude’s continued increase in the face of those growth worries demonstrates how many traders anticipate tight supplies to push up prices, increasing gasoline expenses for consumers and companies. Energy shortages are delaying industrial output across the globe, leading to an increase in inflation recently. Concerns about rising consumer prices and rising government bond rates have fueled recent stock market volatility in the United States.
Even if fewer people travel and use gasoline, many experts believe that falling energy company investment in new supplies will keep oil prices stable. Investors are putting pressure on businesses like Pioneer Natural Resources Co. and Occidental Petroleum Corp. to cut costs and reduce environmental harm while returning money to shareholders.
Some now predict that a global scarcity of natural gas and other fuels required to power homes and companies may spill over into the oil market. With European electricity costs rising, U.S. natural-gas futures reached a nearly 13-year high of $6.31 per million British thermal units on Oct. 5, extending the year’s gain to almost 150 percent. Despite a recent drop, prices may rise much more if cold weather increases demand in the coming months.
High natural-gas prices and depleted stocks, according to some experts, may lead to certain power plants using oil as an alternative to natural gas for electricity production. This would raise oil demand at the same time that traders increase their bets that investor pressure on the environment would lead to long-term shortages, adding to the momentum.
“Right now, a lot of things are feeding on itself,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Management. She has maintained her preference for energy infrastructure businesses that store and transport energy. “We have no idea what the weather may bring… The worst-case scenario is very dreadful.”
According to some experts, investors who have long shunned the underperforming energy sector due to low returns and environmental concerns are catching up and expanding their exposure to one of the year’s best-performing bets.
The energy sector of the S&P 500 has outperformed the rest of the index this year, gaining nearly 50%. Pioneer, Occidental, and Diamondback Energy Inc. have led the way, while industry heavyweights Exxon Mobil Corp. and Chevron Corp. have lagged many other stocks in the sector but have nonetheless risen.
Investors’ concerns about increased inflation are being exacerbated by rising energy costs.
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On Friday, Brent crude, the worldwide benchmark for oil prices, ended at $82.39 a barrel. In a recent report, Bank of America analysts predicted that if demand rises, Brent might reach $100 this winter. Analysts believe that more price rises would put more pressure on the economy and hamper the Federal Reserve’s efforts to gradually raise interest rates beginning next year.
“What makes for something to watch is the combination of higher-than-normal oil prices with other bottlenecks in the economy,” said Nela Richardson, chief economist at the human-resources software company Automatic Data Processing Inc. “It puts the Fed in an awkward situation.”
Other policymakers across the globe are paying attention to the price changes. Last week, Russian President Vladimir Putin suggested that boosting supplies of the power-generation fuel to Europe might help ease the natural-gas situation, lowering costs.
Meanwhile, at a recent Financial Times conference, US Energy Secretary Jennifer Granholm said that the US is contemplating releasing oil from the Strategic Petroleum Reserve. President Joe Biden encouraged the Organization of Petroleum Exporting Countries (OPEC) early this year to boost oil production more rapidly in order to alleviate any supply concerns.
Oil prices are also in the spotlight, since they have recently risen only weeks before a global climate conference in Glasgow, Scotland. The recent fluctuations, according to many experts, demonstrate the dangers of phasing out fossil-fuel output too fast.
“When you look about energy supply and power production now, there’s a lot less margin for mistake,” said Stacey Morris, director of research at index provider Alerian. “That’s what’s causing some of the issues we’re experiencing.”
Analysts believe that OPEC, nations like Russia, and private businesses that are less susceptible to environmental pressure will have greater influence in commodities markets. OPEC has decided to continue to gradual supply increases, boosting oil prices even further.
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While actions like reserve releases may temporarily assist to balance energy markets, some investors believe that the long-term drive by investors for producers to reduce supply and emissions will help to keep prices high.
Many experts believe that climate concerns would restrict the supply of copper and other metals, but demand concerns have recently harmed those prices. According to Jefferies, the Chinese property industry accounts for approximately 10% of global copper demand, therefore some traders now believe metals markets will be sufficiently supplied.
Many investors argue that this isn’t the case with oil.
“There’s a scarcity mindset,” said Noah Barrett, a Janus Henderson Investors energy research analyst. “People are expecting the market to tighten.”
In the Baltic Sea, there is an oil platform. Some investors believe that oil output will not be able to keep up with demand in the future.
Photo courtesy of Vitaly Nevar/Reuters
Amrith Ramkumar can be reached at [email protected]
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