The protracted rise in oil prices leaves out other industrial commodities, a divergence that reflects bets that energy supply shortages will offset any slowdown in the global economy.
US crude rose more than 2% Monday morning to reach a seven-year high of $ 81.50 a barrel, bringing its rise since the end of October to more than 120%. If it holds, it will be the first time the U.S. oil benchmark has closed above $ 80 a barrel since October 2014, when the shale revolution triggered a multi-year drop in fossil fuel prices.
Oil is now on track to overtake copper this year by the largest amount since 2002 and has led the commodity index with the largest margin for more than a decade, according to Dow Jones Market Data. Like petroleum, natural gas far exceeds other commodities.
Copper prices are about 10% below a May record, while rebounds in some other materials such as zinc and lead have largely stalled.
Some industrial metals fell on fears of slower growth in China, the world’s largest consumer of raw materials and the largest importer of oil. The economic fallout from the looming collapse of indebted real estate developer China Evergrande Group could amplify the slowdown caused by the Delta variant of the coronavirus, traders say. Indeed, the Chinese economy depends heavily on real estate developers for growth and employment.
The persistent rise in crude in the face of these growth concerns shows how many traders expect low supply to support prices, raising fuel costs for consumers and businesses. Energy supply shortages are slowing factory activity around the world and contributing to a recent pickup in inflation. Concerns about accelerating consumer prices and rising government bond yields have in turn triggered volatility in US stocks in recent weeks.
Even though fewer consumers are traveling and consuming fuel, many analysts predict that falling investment in new supplies by energy companies will support oil prices. Investors put pressure on companies, including Pioneer Natural Resources Co.
and Occidental Petroleum Corp.
, to limit expenses and environmental damage while returning money to shareholders.
Today, some are betting that a global shortage of natural gas and other fuels needed to power homes and businesses will spill over into the oil market. With electricity prices soaring in Europe, US natural gas futures on October 5 hit an almost 13-year high at $ 6.31 per million British thermal units, raising their lead to the year to nearly 150%. Despite a recent pullback, prices could rise even more if cold temperatures in the coming months increase demand.
High natural gas prices and depleted inventories could prompt some power plants to use oil as an alternative to natural gas for power generation, some analysts say. This would stimulate demand for crude at the same time as traders increase bets that environmental pressure from investors will lead to shortages in the long run, adding to the momentum.
âThere’s a lot going on right now,â said Rebecca Babin, senior energy negotiator at CIBC Private Wealth Management. It continued to favor stocks of energy infrastructure companies that store and transport energy products. “We don’t know what the weather will bringâ¦ The worst-case scenario is pretty ugly.”
Investors who have long avoided the lagging energy sector due to low yields and environmental fears are catching up and increasing their exposure to one of the top performing trades of the year, some analysts have said.
The S&P 500 energy sector was the top performing group in the broad index this year, advancing about 50%. Bounce in stocks of companies such as Pioneer, Occidental and Diamondback Energy Inc.
led the way, while industry giants Exxon Mobil Corp.
and Chevron Corp.
have tracked many industry stocks but have nonetheless surged.
Brent crude, the global gauge of oil prices, closed at $ 82.39 a barrel on Friday. Bank of America analysts said in a recent note that Brent could hit $ 100 this winter if demand increases. Further price increases could add pressure on the economy and complicate the Federal Reserve’s plans to gradually raise interest rates from next year, analysts said.
âIt’s the amalgamation of higher than normal oil prices with other economic bottlenecks that do something to watch out for,â said Nela Richardson, chief economist at the resource software company. Human Automatic Data Processing Inc. “This puts the Fed in an awkward position.
Price movements are attracting the attention of other policymakers around the world. Russian President Vladimir Putin said last week that Moscow could help calm the natural gas crisis by increasing Europe’s supply of power generation fuel, lowering prices.
For her part, US Secretary of Energy Jennifer Granholm told a recent Financial Times conference that the United States is considering releasing oil from the Strategic Oil Reserve. Earlier this year, President Joe Biden urged the Organization of the Petroleum Exporting Countries to increase oil production faster to ease supply constraints.
Oil prices are also a major concern as their recent surge comes just weeks before a world climate summit in Glasgow, Scotland. Many analysts say the recent fluctuations point to the risks of phasing out fossil fuel production too quickly.
“There’s a lot less room for error today when you think about energy supply and power generation,” said Stacey Morris, research director at index provider Alerian. âIt creates some of the problems that we see. “
OPEC, countries like Russia and private companies that are under less environmental pressure are poised to exert more influence in commodity markets, analysts said. OPEC recently chose to stick to measured increases in supply, thus helping oil prices to rise even more.
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Measures such as releasing reserves could help balance energy markets briefly, but some investors still believe that long-term pressure from investors for producers to reduce supply and emissions will help support prices.
Many analysts expect the supply of copper and other metals to be constrained by climate concerns, but demand concerns have recently hurt these commodities. China’s real estate sector accounts for around 10% of global copper demand, according to Jefferies, so some traders now believe metals markets will be adequately supplied.
This is not the case for oil, many investors said.
âThere is this scarcity mentality,â said Noah Barrett, energy research analyst at Janus Henderson Investors. âPeople are anticipating a tighter market. “
Write to Amrith Ramkumar at [email protected]
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