High oil prices will eventually dampen demand, but not yet

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High oil prices and runaway inflation will eventually dampen demand – and possibly lead to a recession – but energy consumers aren’t there yet, analysts say.

The Energy Department announced last week that demand for all petroleum products was up 4% from the same period a year earlier, driven by jet fuel consumption as Americans resumed travel with a vengeance .

With demand holding up and supplies still tight, expect oil and other commodity prices to stay higher for longer, he said. Paul Hickin, associate director for oil at S&P Global Commodity Insights.

“The market is being carried along by the bullish momentum on the petroleum products side, with jet fuel, diesel and gasoline prices all close to or at record highs in tight inventories.” he said. “Strong European and American seasonal demand is expected to persist through the summer.”

The price of West Texas Intermediate, the US benchmark, rose 1.5% last week to settle at $120.67 a barrel on Friday.

Meanwhile, the war in Ukraine continues to disrupt global trade. Increasingly blocked in Western markets, Russia is selling crude at very advantageous prices to its Asian customers. Much of Europe, meanwhile, is looking for replacements as it strives to end its dependence on Russian crude.

“We are at the start of an epochal shift in oil trade flows, with the vast majority of Russian oil being redirected from Europe to Asia,” said Claudio Galimberti, senior vice president of analysis at the Norwegian consulting firm Rystad Energy. “In turn, the Middle East is once again becoming a major oil supplier for Europe.”

But Middle Eastern producers are either unable, as in the case of Libya, or unwilling to bring much more oil to market. U.S. crude is filling some of the void and Venezuela is getting back in the game, but markets will remain tight as long as major producers such as Russia and Iran are under Western sanctions.

Rising energy costs and general inflation are already weighing on the economy as a whole. Last month, OPEC lowered its global economic growth forecast to 3.5% from 3.9%, down from 5.8% in 2021.

The U.S. economy contracted about 1.5% in the first quarter and financial markets are retreating as investors brace for significantly higher interest rates as the Federal Reserve moves aggressively to rein in the ‘inflation.

After the Department of Labor announced on Friday that inflation was approaching 9% – a 40-year high – some analysts speculated that a three-quarter point hike in the Fed’s benchmark rate was on the way. table at the decision-makers’ meeting this week. Such a rise would border on economic shock therapy and only add to fears that sharply rising rates in an economy buoyed by easy money for more than a decade could trigger a recession.

“It all looks like a bubble,” said Al Salazar, chief executive of energy data firm Enverus. “I don’t know what pin is popping that bubble, or how big the bubble is.”

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