What can investors expect next for record oil prices?

Nearly halfway through the year, energy is still the only S&P 500 sector up in 2022. The S&P 500 Energy Sector is up 58% in 2022, and 4 of the 11 main S&P 500 sectors are down over 20%.

High oil prices summarized…

1/ Setting the industry up: The industry underinvested in oil production during COVID, and many projects were postponed or canceled.

2/ Stepping on the gas: The Russia/Ukraine war has led to a boycott of Russian oil — removing supply from one of the world’s largest oil exporters.

3/ No help from producers: Oil giants — which are expected to generate more cash than they did in the past two decades — are ignoring The White House’s request to pump more oil.

TLDR: There is a major oil shortage.

This brings us to today’s sky-high crude oil and gas prices, which have taken the U.S. gasoline average price above $5 per gallon.

How much more oil can the world consume?

Last week, OPEC member United Arab Emirates said prices are “nowhere near” peak yet (BBG). As China’s economy recovers, so will its oil consumption.

• Rising China demand: Per China National Petroleum Corp., China — the world’s largest crude importer, could increase its consumption by 12% in the third quarter.
• Falling supply: Last week, data showed crude oil inventories at the largest storage hub fell and a group of major oil producers OPEC+ said they don’t have extra supply.

News of Shanghai potentially going back into lockdown is one of the few announcements bringing down prices, which is not a sustainable way to lower prices. It’s also difficult to see how this could reverse in the short term with the peak summer travel season here for many countries.

Investors: Oil predictions

At this rate, Brent Oil is well on its way to breaking the 2008 record of $147.50 per barrel.

• Goldman upped its forecast to $140 a barrel for the third quarter, and Morgan Stanley has a bullish scenario at $150.
• JPMorgan CEO Jamie Dimon thinks oil prices could rise to $175 later this year (FT).

But oil prices can quickly reverse as fast as they rose. After the 2008 financial crisis, oil prices collapsed by 70% in the following six months. One scenario that will bring prices down is also one that most people won’t like — a recession that destroys demand.