Oil has risen by almost 70% since the election, a record in the modern era

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This is easily the biggest post-election gain at this point in the presidential cycle since NYMEX began trading in 1983, according to an analysis by CNN Business. The next closest post-election rally was when crude jumped 31% after President George HW Bush’s 1988 victory.

Gasoline prices are also rising, up 27 percent since the election, with the national average hitting $ 2.70 a gallon this week, according to AAA.
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“Higher oil prices are a reflection of optimism about economic growth as the world begins the vaccination process to overcome the pandemic,” said Jason Bordoff, founding director of Columbia University’s Center for Global Energy Policy.

In recent months, the United States has made major progress in defeating Covid. Both Pfizer (FE) and Modern (MRNA) launched highly effective vaccines late last year and, after a slow start, implementation has accelerated. The country could be just a few days away from gaining access to the first single vaccine.

And as more Americans get vaccinated, they can return to flying, making road trips and cruises – which in turn will increase the demand for oil crushed by the health crisis. Bank of America predicts it will grow by 2023 at the fastest pace in the 1970s.

The pandemic, combined with a bad price war between Saudi Arabia and Russia, caused the darkest day of the oil market last April. Crude oil fell below zero, hitting $ 37 a barrel.

GameStop factor

But just as he was overwhelmed, some fear he may be out of control.

“This is a lot more like a financial rally than a fundamental one,” Jim Mitchell, chief oil analyst in America at Refinitiv, said. He estimated that US oil prices are 7 to 8 USD higher than if supply and demand dynamics suggest they should be.

Consider that US gasoline demand – the biggest price factor for oil – has not been so low in February 1997

So why is overtaking oil fundamental? Simple money on Wall Street is looking for a home. The Fed’s low interest rates are encouraging investors to bet on risky assets. Everything from Amazon (AMZN) and GameStop on bitcoin and SPACs are on fire. It only makes sense for oil to join the party – especially since crude oil is a way to bet on higher inflation.
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“We’re moving the cash flow higher. But if the money keeps flowing, it’s going to be a bit like GameStop,” said Tom Kloza, global head of energy analysis at the Oil Price Information Service.

In other words, the gains can be unsustainable.

For now, Wall Street analysts are betting that the rally is just beginning. Goldman Sachs now says US oil prices will average $ 72 a barrel in the third quarter, up from $ 62 previously. Some investment banks are even demanding a new “supercycle” that could bring oil to $ 100.

“It’s very, very premature. It’s like when someone wins a championship in sports and immediately starts talking dynasty,” Kloza said.

$ 3 gasoline risk

The risk is that energy prices will rise to levels that are slowing recovery by increasing uncomfortably high costs for drivers.

“$ 3 a gallon of gasoline is a number that attracts the public’s attention, such as 100 baseball wins,” Kloza said.

Although Kloza does not believe the national average will reach $ 3 a gallon this year, he warned that doing so would cause “irresponsible guilt” to the White House and oil producers.

Others are skeptical that higher energy prices will keep Americans tired of quarantining roads and planes this summer.

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“If you get stuck at home for a year, you’ll probably go on vacation, whether it’s $ 40 or $ 90,” said Ryan Fitzmaurice, an energy strategist at Rabobank.

In any case, today’s digital economy (less production, more electric vehicles and remote operation) could withstand higher prices than in the past.

“It simply came to our notice then far away less sensitive to oil price movements than it has been in our lifetime, “said Joe Brusuelas, chief economist at RSM International.” Many of us are still trapped in the oil price shock of the 1970s. But we have been saving more since then. “

OPEC, which was behind the shock of the 1970s, could soon add more barrels to the world market. The group, along with Russia, could decide next week to reduce production limits from April. That could cool the market.

The last oil dance?

The current The oil rally comes at a time when Washington’s energy policy is changing tremendously after four years of the Trump administration favoring fossil fuels.

President Joe Biden moved quickly to address the climate crisis, re-entering the United States under the Paris Agreement, revoking the Keystone XL pipeline permit and ordering a moratorium on new oil and gas leases on federal lands and water areas. These steps are a blow along the arc of the oil industry and could ultimately reduce US fossil fuel production.
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However, analysts are skeptical that the current rally is directly linked to the administration’s oil repression. Crude has risen 20 percent more modestly since Trump’s last day in office.

“Biden’s climate policy has nothing to do with the current oil price rally,” said Bordoff, a Columbia professor who served as an energy adviser during the Obama administration.

But the climate crisis and electric vehicles remain real threats to oil.

In a report titled “Oil’s Last Dance,” Bank of America recently predicted that electric vehicle sales will reach 34% of total car sales by 2030 and exceed sales of gas-powered vehicles by 2035. The bank expects for global oil demand to peak around 2030.

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