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As Oil Prices Soar, Energy Paradigm Shifts, 3 Market Signals To Watch

By Ellen R. Wald, Ph.D.CommoditiesMar 03, 2022 05:06AM ET
www.investing.com/analysis/as-oil-prices-soar-energy-paradigm-shifts-3-market-signals-to-watch-200619193
As Oil Prices Soar, Energy Paradigm Shifts, 3 Market Signals To Watch
By Ellen R. Wald, Ph.D.   |  Mar 03, 2022 05:06AM ET
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Russia's incursion into Ukraine, along with the triple-digit oil prices for both Brent and WTI the invasion helped trigger, have altered the energy landscape in just two weeks.

Crude Oil WTI Weekly Chart
Crude Oil WTI Weekly Chart

Given the still shifting paradigm for the commodity itself—both from the price and production perspective—and the global economy which depends on it, there are three important considerations to keep in focus in order to stay on top of how market participants may react and what the possible consequences could be.

1. Will OPEC+ rebuff the pressure to cut ties with Russia?

The OPEC partnership with Russia and other countries has proven to be fairly effective. Indeed, it's lasted longer than some experts expected.

These producer countries seem to work well together, for the most part. Yet in this political and social climate, everyone from publishing businesses to governments to energy companies to international sports federations are cutting ties with Russia.

The question is whether OPEC will feel compelled to distance itself from Russia. It is unlikely that OPEC will give in to external global pressure, because, typically, OPEC does not let politics or sentiment get in the way of its goals. Right now, Russia is consistently one the world’s top three producers of oil. It is the essential component of OPEC+. Saudi Arabia and Russia combined are the most powerful supply-side force in the market today.

If OPEC does feel compelled to separate itself from Russia, OPEC’s market influence would be severely diminished. Moreover, the cartel may never entice Russia to rejoin if it cuts ties today.

2. Will high oil prices encourage greater domestic production in the U.S.?

ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) both indicated this week that they are not planning to grow oil production significantly over the next five years. These announcements come even though prices are in the triple digits. They may change their plans, but this is what they are telling investors today.

These corporate announcements, which seem counterintuitive to the rising oil price, nonetheless serve to keep the stock price high and push it higher. For example, Barron’s pointed out on Mar. 2 that after ExxonMobil’s announcement, "the stock is rising."

However, if elevated oil prices remain, the enticement of more revenue may be too much to ignore, especially for smaller producers. They have been held back from increasing output because of uncertainty in regulation and permitting from the federal government and because of a lack of financing. Soaring oil prices will surely convince some producers that it's worth the uncertainty of dealing with changing government policies.

In addition, lofty oil prices will be too tempting for financiers to ignore. Some investors and lenders will step in, providing additional capital that they'll make available for the industry. What we cannot predict is how much more production will come online and how quickly that production might materialize.

3. Will more interest in alternative energies and discussion of "peak demand" return?

Oil prices were up for much of the first decade and a half of this century. With those heightened prices came renewed investment in alternative energies and electric vehicles. It also led to discussions and predictions of an idea called "peak demand."

However, for the last seven years, oil prices have been significantly lower, and there has been less incentive for consumers to worry about the price of gasoline or the price of utilities.

Now that oil and gas prices are elevated again, we may very well see a return to consumer interest in alternative energies. High oil and gas prices are used as strong selling points to convince consumers to purchase electric vehicles and install solar panels on their homes. Governments around the globe—particularly in North America and Europe—are already regulating and legislating behavior to support alternative energy industries. But triple-digit oil prices will further incentivize consumers to pursue these options as a way to lower their energy costs.

Before the COVID pandemic, global demand for oil was over 100 million bpd. Though it's still recovering, it is around 100 million bpd now. It is not yet clear how high oil prices have to go—and remain at those levels—to cut into demand.

Some analysts believe that oil prices will need to reach the $150 or $170 per barrel mark in order to see demand destruction. However, if the prices stay high, look for renewed talk of peak demand which, in turn, tends to be a downward force on prices.

As Oil Prices Soar, Energy Paradigm Shifts, 3 Market Signals To Watch
 

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As Oil Prices Soar, Energy Paradigm Shifts, 3 Market Signals To Watch

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Comments (7)
andrew cando
andrew cando Mar 03, 2022 3:57PM ET
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we are enriching the middle east now. Watch the next powder keg to lit is from the middle east
doug str
doug str Mar 03, 2022 3:57PM ET
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Solution is to invest in North American oil and gas.
Alan Rice
Alan Rice Mar 03, 2022 1:11PM ET
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Lets all learn what the term "soar" means.
Matthew Carter
Matthew Carter Mar 03, 2022 12:19PM ET
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That's great and all but the US will always be dependent on one dictatorship whether that be China or Russia. One has the oil and gas while the other has the resources for renewable. We could solver all of it as we too have such resources but as we have seen our government would rather appease to dictators then to just open up new leases, pipelines, etc. Russia sure has done a great job pushing American into reliance on others. We look lost at the wheel while Russia has the upper hand.
Eric Archambault
ErictheRed Mar 03, 2022 12:14PM ET
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"Incursion". Wow, what a sophism.
Bhagwan Dass
Bhagwan Dass Mar 03, 2022 11:45AM ET
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I don't know how us people choose this devil president Biden
Raj Patel
Raj Patel Mar 03, 2022 11:45AM ET
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Because the other choice was even worse.
Matthew Carter
Matthew Carter Mar 03, 2022 11:45AM ET
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Biden makes Jimmy Carter look great. No such thing as a perfect president but anyone who thinks Biden is still the better option should have their head examined.
doug str
doug str Mar 03, 2022 11:45AM ET
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It is called voting. If you don't like what you got, get involved.
Jeff Page
Jeff Page Mar 03, 2022 9:31AM ET
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As always, thank you!
Mohd Izhar Muslim
Mohd Izhar Muslim Mar 03, 2022 6:12AM ET
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look lovely, thank you for the article 💯
 
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