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Gas Prices: Why the High Cost Is Here to Stay

Oil prices are back to about where they were in the early days of the war in Ukraine, and there is no prospect of significant relief for drivers and businesses any time soon.

The price of Brent crude, the global benchmark, rose above $124 a barrel earlier this week – its highest level since early March – after the European Union announced it would cut 90% of its Russian oil imports by by the end of this year.

Prices have since fallen slightly to around $117, largely on expectations that OPEC will pump more oil, but not enough to dull the pain felt by consumers at the pump or to control runaway global inflation. The EU embargo and a recovery in demand in the world’s second largest economy will keep them high.

Matt Smith, senior oil analyst for the Americas at Kpler, an analytics firm, told CNN Business that “three-digit oil prices” are likely to remain.

“If Chinese demand comes back strong after the shutdowns and Russia continues to see production decline, then a retest of the US$139 high seen earlier in the year is not out of reach,” he said. he declared.

Europe abandons Russian oil

Even if runaway inflation and sluggish growth raise the specter of recession, global oil demand is unlikely to fall enough to drive prices down, as it did in 2008.

“The concern this time around is – because this is a supply issue – that even if we head into a recession … we won’t necessarily see prices at the pumps come down substantially. “Smith said.

The European Union officially adopted its oil embargo on Friday, part of a sixth package of sanctions imposed on Moscow for its invasion of Ukraine. Most EU countries now have six months to eliminate imports of Russian crude and eight months for all other petroleum products.

For now, Smith said, the bloc will likely continue to buy oil from Russia, but it has been looking at other suppliers. According to data from Kpler, crude imports from Angola have tripled since the start of the war, while Brazilian and Iraqi volumes have increased by 50% and 40% respectively.

Oil supplies from more distant sites will keep prices high, Roslan Khasawneh, principal fuel oil analyst at Vortexa, an energy data company, told CNN Business.

“A direct impact of this is the higher freight cost due to the longer trips and, therefore, oil delivery costs,” he said.

Governments can do a few things to lower prices, including providing fuel subsidies and capping prices at the pump. But the silver bullet the world really needs to bring prices down – a lot more supply – is hard to come by.

Insufficient alternatives

Last year, Russia accounted for 14% of the world’s oil supply, according to the International Energy Agency, and Western sanctions against Russia are already creating a significant void in the market. Russia closed nearly 1 million barrels per day of oil production in April and that could reach around 3 million barrels per day in the second half of 2022, according to the IEA.

The Organization of the Petroleum Exporting Countries and its allies, a group known as OPEC+, agreed on Thursday to pump an additional 648,000 barrels of crude per day into the world market in July and August, 200,000 more than foreseen, within the framework of an agreement including Russia. .

IEA predicts that global oil production, excluding Russia, is expected to increase by more than 3 million barrels per day for the rest of this year, balancing the impact of sanctions.

But Smith thinks that might be difficult to pull off. Even before the war in Ukraine, he said, oil producers were reducing investment in production as they turned to renewable energy. And OPEC has its limits.

“OPEC+ is already struggling to keep pace with the current deal – even major OPEC members such as Saudi Arabia, the United Arab Emirates and Kuwait exported considerably less last month than in April,” he said.

Giovanni Staunovo, strategist at investment bank UBS, said in a note on Thursday that “many OPEC+ member states have already reached their capacity limits.”

“That means actual production increases will likely be about half of the target increase,” he said.

Strong global demand

For months, draconian coronavirus lockdowns in Shanghai and Beijing and other major Chinese cities have weighed on demand in the world’s biggest oil-importing country.

But as the Chinese government begins to lift those restrictions, pent-up demand could drive prices up. China could also further increase its oil imports from Russia, whose benchmark quality Urals crude is trading at a discount of US$34 a barrel to Brent.

Vortexa estimates that China imported 1.1 million barrels a day of Russian maritime oil in May, up about 37% from last year’s average.

Kpler’s Smith said he doesn’t expect demand in China to “roar” back due to its phased approach to lifting restrictions.

But “the biggest bearish influence on prices has been eliminated, hence all the more reason to expect to see prices supported around current levels going forward,” he said.

US fuel demand has also proven to be quite resilient despite exorbitant prices. In the week ending Saturday, the amount of gasoline pumped at U.S. gas stations was down just 5% from the same week a year ago, according to OPIS, which tracks gasoline prices. gasoline and consumption data.

The modest decline came as the national average price rose more than 50% year-over-year to US$4.60 per gallon in late May.

Chris Isidore and Mark Thompson contributed reporting.

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