Russia launched a new invasion of Ukraine on February 24, 2022, contributing to the recent steep rise in Brent and West Texas Intermediate (WTI) crude oil prices. The rapid spike in crude oil prices reflects increased geopolitical risk and uncertainty about the impact of recently announced and anticipated future sanctions on global energy markets. We raised our projected price of international benchmark Brent crude oil to $116 per barrel (b) for the second quarter of 2022 in our March 2022 Short-Term Energy Outlook (STEO), which was finalized on March 3. During the second quarter of 2022, we estimate gasoline prices to average around $4.10 per gallon (gal) and then fall for the rest of the year.
The price of WTI, the U.S. standard, is expected to average $113/b in March and $112/b in the second quarter of 2022, according to our prediction. Due to a number of circumstances, including Russia’s continued invasion of Ukraine, government-imposed restrictions on energy imports from Russia, Russian petroleum production, and global crude oil consumption, our projection is fraught with uncertainty.
Our forecast is more optimistic. The price of Brent crude oil has also increased our expectation for gasoline retail prices. We predict gasoline prices in the United States to average $4.00 per gallon this month, rise to a forecast high of $4.12 per gallon in May, and then gradually decline for the remainder of the year. We estimate that normal retail gasoline prices in the United States will average $3.79 per gallon in 2022 and $3.33 per gallon in 2023. If implemented, the average retail gasoline price in 2022 would be the highest since 2014, once inflation is factored in.
President Biden declared on March 8 that the United States would prohibit Russia from importing oil, liquefied natural gas, and coal. The United Kingdom has stated that it will phase out oil imports from Russia by 2022, while the European Union has stated that it will considerably limit the amount of fossil fuels imported from Russia by 2030. We finished our March STEO report before the US, the UK, and the European Union all announced new restrictions on Russian energy imports, thus our forecast does not factor in the impact of these statements on energy markets.
Furthermore, some multinational oil companies have indicated plans to cease operations in Russia and terminate relationships with Russian firms, potentially limiting future crude oil production in the country. The fresh pronouncements may increase upward pressure on crude oil prices; but, any international response and the implications of that response on global balances remain unknown.
Will oil prices continue to rise?
Brent crude oil prices are expected to average $82.87 per barrel in 2022, according to the EIA. WTI is expected to average $79.35 per barrel in 2022, up from $68.21 per barrel in 2021. Oil prices are rising due to a drop in supply and a rise in demand.
What causes the price of oil to rise?
Impact of Supply and Demand Oil prices fluctuate according to supply and demand, just like any other commodity, stock, or bond. Prices fall when supply exceeds demand, and vice versa when demand exceeds supply.
How much will oil cost in 2023?
The agency anticipated a declining Brent oil price in the second half of this year (2H2022) and into 2023 in its March edition of its Short-Term Energy Outlook (STEO). The most recent STEO forecasted a $102 oil price in 2H2022 and a $89.50 price in 2023.
In the best of times, however, prognostication in the energy space is loaded with dangers. Recent events have made the effort much more challenging, as EIA researchers noted in a special statement released in conjunction with this month’s STEO.
Will oil reach $100 per barrel?
This week, Goldman Sachs forecast that the price of oil might reach $100 per barrel this year, putting more pressure on the Biden administration to handle the country’s growing energy issue.
Goldman Sachs analysts predicted Brent crude would surpass $100 per barrel in the third quarter of 2022 in a note to clients. According to their forecasts, prices might reach $105 in the first three months of 2023.
Goldman remarked on a “Despite an increase in COVID-19 instances caused by the Omicron variation, there is a “surprise huge gap” in the oil market as demand remains high. By this summer, oil inventories might be at their lowest level since 2000, according to researchers.
A variety of variables have been identified by experts as contributing to the price increase. As global economies reopen following the COVID-19 epidemic, OPEC+ countries have rejected requests to raise output in order to meet rising demand, while geopolitical tensions between Russia and the United Arab Emirates have sparked fears of more market instability.
The White House told Reuters earlier this week that “options remain on the table” to address oil prices.
“We continue to work with producer and consumer countries, and these efforts have had genuine effects on prices,” a National Security Council spokesperson said. “Ultimately, instruments remain on the table for us to handle prices.”
Oil prices touched a seven-year high earlier this week, with supply fears exacerbated by global tensions. Brent crude prices have surpassed $87 per barrel, while WTI crude futures have surpassed $85 per barrel.
The Biden administration is concerned about rising costs ahead of the 2022 midterm elections. In December, inflation reached 7%, the highest level in four decades.
According to AAA, the national average price of a gallon of gas was $3.32 on Wednesday. When compared to the same day last year, when a gallon cost roughly $2.39, prices have risen dramatically.
Throughout the year, the tendency is projected to worsen. According to GasBuddy, prices might reach $4 per gallon by Memorial Day.
Will the price of oil fall in 2022?
Late Tuesday, the US Energy Information Administration (EIA) revised up its global crude oil price forecast for 2022 by roughly 27% from its February estimate.
The EIA raised the trading price of Brent crude by $22 per barrel to an average of $105.22 per barrel in its March Short-Term Energy Outlook (STEO), and the American benchmark West Texas Intermediate (WTI) to $101.17 per barrel.
“The increased price projection includes some uncertainty regarding supply disruptions and additional sanctions connected to Russia’s continued assault of Ukraine,” according to the agency.
Brent is expected to fall to $88.98 per barrel in 2023, while WTI will fall to $84.98 per barrel, according to the agency.
The EIA emphasized, however, that the price projection is “very unpredictable,” as actual price outcomes will be determined by the severity of Russia’s sanctions, any potential future sanctions, and the impact of independent business actions.
The degree to which other oil producers respond to present oil prices, as well as the effects that macroeconomic changes may have on global oil demand, will be significant for oil price formation in the coming months, according to the statistic agency.
“Despite the fact that we decreased Russia’s oil output in our prediction, we still anticipate global oil stocks to grow at an average rate of 500,000 barrels per day (bpd) from the second quarter of 2022 through the end of 2023, putting downward pressure on crude oil prices,” the IEA stated.
“If production disruptionsin Russia or elsewhereare more than expected, crude oil prices will rise faster than expected,” it added.
According to the EIA, Russia’s 11.3 million bpd of petroleum and other liquids production in February will drop by 25,000 bpd in March, with a further drop of 500,000 bpd in April.
According to the agency, production will temporarily fall as a result of certain shippers refusing to pick up crude oil shipments from Russia, primarily as a result of present sanctions or in anticipation of future restrictions.
“While Russia’s crude oil production and export capacity will remain available, the extent to which countries will continue to buy crude oil and petroleum products from Russia is questionable.” While we acknowledge that there is a wide range of possible outcomes for Russia’s oil production, we expect a drop in Russian crude oil exports, and thus production, in the coming months,” the IEA stated.
Crude oil output in the United States is expected to increase to 12 million barrels per day in 2022, up from 11.1 million barrels per day in 2021.
The country’s crude oil output is forecast to hit 13 million barrels per day in 2023, the highest yearly average on record.
Is now a good time to invest in oil?
You could think that oil production and demand peaked a long time ago if you read the headlines in most newspapers, especially with the rise of solar, wind, biodiesel, and other green alternatives. The influential “Club of Rome” coalition of businessmen, scientists, economists, and government officials propagated the concept of “peak oil,” which proved out to be completely incorrect.
The Limits to Expansion was published in 1972, and it was an extremely negative analysis based on an MIT computer simulation of economic and population growth, as well as scarce resources. According to the estimate, all known petroleum reserves would be depleted by the end of the century if consumption levels remained constant. Gas and petroleum would be extinct by 1982 if consumption rates continued to rise.
What happened was that we improved our ability to locate and extract oil and gas! This was owing to advancements in technology as well as fresh discoveries. We now produce 28 percent more oil in the United States than we did at the previously acknowledged “peak oil production” era of 1970. Today, the United States leads the world in oil production, significantly outperforming Saudi Arabia, which is in second place.
Myth #2: Alternative energy is where all the opportunity is!
The truth is that global energy demand is continually increasing, and this demand is being satisfied by both alternative energy and oil and gas expansion. We anticipate that energy will be a “both/and” game for years to come, rather than a “either/or” issue.
Alternative energy is a burgeoning business with a lot of room for expansion. For environmental grounds, it is convincing. It also comes with a lot of danger and expense, some of which has been borne by taxpayers.
Some green energy technologies have proven to be successful. Solar and wind energy are becoming more affordable. Solar energy has proven to be so efficient that solar energy storage has become a profitable industry. Electric vehicles are becoming increasingly popular and attractive, which leads to the next urban legend:
Myth #3: Electric vehicles have decreased the demand for gasoline.
While energy supplies are diversifying in the United States and around the world, which is a positive trend, demand for oil and gas has not diminished. Oil consumption continues to rise, particularly in China and India, as well as in the United States. Since 2006, demand for oil has consistently climbed, as shown in the graph below.
Despite the rise of electric vehicles, demand for all types of energy has only increased as a result of population growth and changing lifestyles. Even as more people purchase electric vehicles, there will always be a demand for oil due to the use of plastics (which are manufactured from petroleum) and the use of diesel in trucks and heavy equipment. (The eia.gov chart below does not include the most recent quarter.)
Myth #4 Oil companies and investors can’t make money at $35 an barrel!
Companies in Texas, for example, are profitable even at $18 per barrel. However, for the shale business to be successful, higher barrel prices are required. We do not advise you to invest in shale companies. Even at current barrel pricing, however, there is a big potential!
Wouldn’t the stock market be the best way to have exposure to oil and gas?
Most likely not. Investments receive large tax benefits in order to encourage the country toward energy independence. This means that drilling costs, from equipment to labor, are tax deductible up to 100% in the oil and gas industry. Oil and gas investments are a great way to offset income or gains from other sources. For many people, this makes oil an excellent investment!
Oil and gas can be purchased in a variety of ways, but stocks are not one of them. Let’s take a look at three possibilities and some of the benefits and drawbacks of each:
Stocks and Mutual Funds
ETFs, mutual funds, and large and small-cap equities are all examples of this. Because most gains are re-invested, stocks offer limited upside for shareholders. Oil spills and other unfavorable headlines can have a severe impact on large corporations and their stock prices.
On the plus side, an oil-and-gas mutual fund or exchange-traded fund (ETF) provides some risk protection through company diversification. If you don’t have a large chunk of money to invest, the stock market can be your only alternative.
Unfortunately, shareholders will miss out on one of the most significant advantages of investing directly: tax deductions!
Equity Direct Participation Programs
The most profitable approach for most investors to participate in oil and gas is through an equity investment or a Direct Participation Project (DPP). A DPP is a non-traded pooled investment that works over several years and provides investors with access to the cash flow and tax benefits of an energy business. (Real estate DPPs, like oil and gas DPPs, operate in a similar manner and, like oil and gas DPPs, can engage in 1031 tax exchanges.)
A DPP is primarily used to fund the development of numerous wells in the oil and gas industry. The benefit to the investor in the first year is the tax write-off, which can be up to 85% of the investment. When the drilling is finished after about a year, investors begin to receive a monthly dividend. Depending on the success of the drilling, the returns can range from very low to very high. The first 15% of this income is tax-free, while the rest is regarded as ordinary income. (Consult a tax advisor.)
The well bundle is normally sold to a larger oil company after around 5 years. The proceeds from the sale are subsequently allocated proportionately among the investors, and the profits are taxed as capital gains.
Asset class diversification, great profit potential, and large tax advantages are all advantages of direct investments in oil and gas. Multi-well packages and skilled operators can help to limit risk to some extent. Investors, on the other hand, must be mindful of the drawbacks. Oil and gas ventures are inherently illiquid and speculative. Returns can be substantial, but they can also be non-existent. Oil prices have an impact on profitability. Furthermore, accredited investors are the only ones who can invest in DPPs.
Mineral Rights Leases
This is not an oil and gas investment, but rather a private financial agreement that works similarly to a real estate bridge loan. Investors are paid monthly cash flow based on contractually agreed-upon returns. The average investment time span is one to three years. Mineral rights leases demand lump sum payments to participate.
In this podcast with Kim Butler, “Investing in Mining Rights,” you’ll learn more about mineral rights leases.
Is Oil a Good Investment for You?
Do you have oil and gas in your portfolio? Direct investments in energy projects can provide significant and almost immediate tax benefits, as well as diversify investments and potentially increase returns. Oil and gas investments are worth considering as part of your overall plan because of these advantages.
For some, oil and gas may be a smart investment, but for others, it is not. There are requirements to be met, risks to be handled, and decisions to be made. The best investments in this field are only available to accredited investors. Some investors choose to put their money into greener options, while others are drawn to the oil and gas industry’s proven track record of earnings.
You might have other concerns about investing in oil and gas. We most likely know the answers! Partners for Prosperity focuses on wealth accumulation outside of the stock market. To learn more about hedging risk, boosting cash flow, and producing wealth that is not reliant on Wall Street dangers, schedule a complimentary appointment now!
Is it wise to invest in oil?
- Day traders and long-term investors alike are drawn to the oil and gas industry.
- The market is busy and liquid, and it can be used to diversify a portfolio and hedge against inflation.
- Oil and gas stocks, on the other hand, are more volatile than the broader market because they are sensitive to fluctuations in the underlying commodities’ supply and demand.
- Furthermore, oil businesses are subject to legal and regulatory risk as a result of mishaps, such as oil spills.
In 2021, what will the price of oil be?
Crude oil prices will fall from 2021 levels, according to our January 2022 Short-Term Energy Outlook (STEO). Brent crude oil, the international pricing standard, averaged $79 per barrel in the fourth quarter of 2021. (b). Brent will average $75/b in 2022 and $68/b in 2023, according to our projection.
The drop in prices is due to a shift in global petroleum inventory levels from decreases in 2021 to gains in 2022 and 2023. When demand exceeds production, global petroleum inventories fall, and when production exceeds consumption, inventories rise.
The outflow of 1.4 million barrels per day (b/d) from global petroleum stockpiles in 2021 contributed to increased crude oil prices. After the COVID-19 epidemic began in 2020, petroleum demand returned quicker than petroleum output, resulting in these inventory draws. We anticipate that petroleum output will rise in 2022, while consumption growth will stagnate, resulting in an increase in global petroleum stockpiles.
We forecast a 5.5 million b/d increase in global petroleum output in 2022, driven by increases in production in the United States, OPEC, and Russia, which together account for 84 percent of the gain, or 4.6 million b/d. Increased tight oil production in the United States, as well as progressively growing crude oil production from OPEC+ (which includes OPEC countries and Russia), will account for the majority of increased crude oil production, according to our prediction.
We estimate that worldwide petroleum consumption will rise by 3.6 million b/d in 2022, owing to increased consumption in the United States and China, which account for 39 percent of the growth. Global petroleum stockpiles are expected to rise by 0.5 million barrels per day in 2022, putting downward pressure on crude oil prices. Brent crude oil is expected to fall from $79 per barrel in the first quarter to $71 per barrel in the fourth quarter of 2022, according to our prediction.