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Central banks may ban oil and gas rally

Almost every day there are warnings that the supply of oil and liquefied natural gas will be cut short and prices will rise. Investors should not forget the other side of the coin: aggressive monetary rigor is threatening demand.

The latest oil report from the International Energy Agency on Wednesday predicted that economic growth, especially in developing markets, would lead to a deficit of 500,000 barrels of crude next year. Over the past year, the recovery in fuel demand has outpaced a slow rise in production levels. There is no faster way to produce more. For years, producers have been drilling to reduce drilling, increase profits in the U.S., and begin decarbonization in Europe.

Saudi Arabia and the United Arab Emirates, key members of the Organization of the Petroleum Exporting Countries, can now supply more oil, but have been hesitant to act decisively. The IEA predicts that non-OPEC producers will add less than two million barrels a day in 2022 and almost the same in 2023, but says that OPEC + ‘s total production – including allies of the cartel – could be reduced in part as a result of falling Russian exports. . New liquidation facilities are needed to increase the global supply of LNG. All of this adds to the persistent shortage that the benchmark is raising.

But the picture can change quickly if the central bank overcomes its desire to control inflation.

High prices increase producers’ profits, but also inflate the population and cause inflation to the central banks. The Federal Reserve on Wednesday raised a 0.75 percentage point rise in its benchmark interest rate to set a fighting tone in the central bank’s fight against inflation. The Bank of England is expected to raise its benchmark rate by half a percentage point on Thursday.

In theory, central banks only care about what is called core inflation, which excludes food and fuel. However, monetary policy is not an exact science and bankers need nerves of steel to sit on the sidelines as additional fuel inflation raises headline figures. Given the high level of debt around the world, aggressive action can trigger recessions. If this reduces enough demand for oil and gas, the rally may stop.

High fuel prices can also be affected by shifting users to alternatives or by reducing what is called demand destruction. High prices have already forced some European factories to close, and for others, the costs add to switching to alternative fuels or investing in energy-saving equipment. The change could also increase the energy security of oil and gas importers, a priority since Russia’s invasion of Ukraine.

For consumers, the price of gasoline at more than $ 5 per liter has increased the attractiveness of electric vehicles. High-efficiency windows, home insulation and the installation of modern heating and cooling systems return faster. Every small change decreases with demand, but large amounts can be added, just as the US car fuel efficiency standards did after the 1970s oil crisis.

The last commodity supercycle was driven by China’s almost unsatisfactory demand as it grew and built at breakneck speed, but Beijing is targeting lower growth. Other emerging economies have a long way to go, but they won’t help raise U.S. rates in the short term. Covid-19 remains a wildcard that can cause a resurgence, especially as vaccine immunity is reduced.

For now, the world is short of oil and LNG. Rising demand would undoubtedly raise prices more, but the economic recovery needed to do so seems more certain than ever.

The rise in oil costs has helped raise the national average price of a liter of gasoline to $ 5 for the first time, which has exacerbated inflationary pressures on the U.S. economy. Photo illustration: Todd Johnson

Write Rochelle Toplensky at rochelle.toplensky@wsj.com

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Central banks may ban oil and gas rally

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