Oil prices are at seven-year highs, with the cost of West Texas Intermediate crude, the United States benchmark, up 70 percent this year, at more than $80 per barrel. It’s part of a global energy crunch that is pushing prices higher for all types of fuels, including natural gas and coal, the DealBook newsletter reports.
Many Wall Street forecasters believe oil prices are about to peak. Oil use is up from 2020 but below what it was in 2019, when oil prices were lower than they are now. Analysts at Goldman Sachs predicted last week that the price of a barrel of oil could average $85 for the next few years.
But some traders are betting that oil will rise much more. The most widely held option is one that pays out if oil rises higher than $100 a barrel by the end of December. Options trades with strike prices as high as $200 by the end of next year have also been made lately.
Who is right? The question of whether oil prices have nearly peaked or are about to rise much higher rests on what’s driving them up in the first place. Two possibilities:
Short-term, pandemic-induced disruptions: Demand for oil — like the market for many goods — is rising faster than producers can ramp up supply (or, in the case of the Organization of the Petroleum Exporting Countries, are willing to). If that is the case, oil prices are probably near their highs. With China’s economy slowing and the U.S. recovery hitting a weak patch, oil demand is not likely to grow very rapidly in the near future. That should give supply time to catch up, especially as pandemic disruptions fade.
A long-term mismatch between supply and demand rooted in climate change: A recent report from the International Energy Agency found that in order for countries like the United States to become carbon neutral by 2050, oil use must peak by 2025. Yet, based on current investments, green power generation won’t be enough to supplant oil consumption until 2035. This year’s price jump could be the market’s warning sign about future energy crunches and price spikes.