Why High Gas Prices Will Stick Around

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Bad news for your wallet: eye-watering pump prices for gasoline are likely to be here for some time.

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Worse yet, Tuesday’s announcement by the Biden administration to release oil from the Strategic Petroleum Reserve (SPR) will not have a long-term effect on the decline in pump prices, experts say.

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Other important factors that will keep them high over the long term include the Organization of the Petroleum Exporting Countries and Russia, known as OPEC+, green energy policies in the US and investor demands.

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“I don’t think the SPR release will help that much,” says Stewart Glickman, a senior equity analyst at CFRA. “You’re likely to get short-term relief from pain similar to taking an aspirin to cure a headache.”

Across the US, gas prices averaged $3.40 per gallon on November 23, according to AAA, up 61% from $2.11 a year earlier. Glickman says they can easily go up to $3.70, depending on the price of oil. Similarly, the prices of modified gasoline futures contracts on CME have gained momentum over the past one year.

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The reason for high gas prices is simple: oil supply is unlikely to increase in demand as the global economy rebounds from the Covid-19 pandemic lockdown. Typically, excess demand drives oil prices higher, which then translates into rising gas prices. According to TradingEconomics.com, Brent crude, the European benchmark, was recently gaining $82 a barrel, up from about $47 a barrel a year ago.

There could be three main reasons for the increase in prices next year. The first is OPEC+, which plans to increase marginal oil production. “OPEC+ sticks to its steady progress on quota increases, yet its actual output deficit continues to widen,” a Morningstar report said.

The lack of OPEC+ supply response should be worrying. TortoiseEcofin Portfolio Manager Rob Thummel says crude demand is expected to exceed pre-Covid levels next year. In other words, the increase in supply from the oil cartel will likely not keep up with the increase in demand.

The second issue is that the policies of the Biden administration are restricting the supply response from the US energy industry. It may sound cruel but the noble goal of promoting clean energy is helping drive up gas prices. ,[The administration’s approach] is the first to be quite hostile towards the domestic oil and gas industry,” said a recent CFRA report. .” And it appears to have done just that.

Investors are also having an impact on oil prices. Wall Street has long wanted exploration-and-production (E&P) companies to take a more measured approach to expanding production. The energy industry expanded during the boom period with new exploration and development projects. But now big oil has finally got the message: Take care of shareholders before anything else.

“Once the spender E&PS continues to keep its purse strings tight, it eliminates the former source of incremental supply,” Morningstar reported. Result: Oil reserves could fall to levels not seen in more than half a decade.

What can investors do to reduce these wallet-emptying fuel costs? Try buying unhedged oil stocks like ConocoPhillips (ticker: COP) or Occidental Petroleum (OXY), says the CFRA. Both are expected to benefit from potentially higher oil prices next year.

Of course, oil and gasoline prices could fall if demand falls, such as in the event of another wave of COVID-19 lockdowns, as recently announced in Austria and other European countries. A week ago, the risk of a widespread lockdown seemed far-fetched—now less.

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