The oil market recovery is here, and it’s bigger than many analysts had expected. Unprecedented in the modern era, the price of American oil has gained almost 70% since the election in November.
It’s the biggest gain in a post-election period, with the previous record being the 31% gain after Former President George H.W. Bush won the 1988 election.
Headwinds and Tailwinds of Higher Oil Prices
Oil prices are expected to continue to increase unless Russia and OPEC nations start producing more barrels. America now produces all the oil that it needs for domestic use, but this doesn’t make it immune to competition. The price of a US barrel hit $63.50 towards the end of last week. Continued growth could make international oil more competitive and could bring a negative spotlight upon American producers.
It’s a boon for the extractors and the energy industry, but a major headwind for consumers.
Average Americans, who haven’t even fully recovered from the Coronavirus Pandemic and its sweeping social and economic impact, are now paying more for gasoline at the pump. The increase isn’t as drastic as crude, but gasoline now costs 27% more than it did before the election.
Why Are Oil Prices So High?
Analysts have surmised that the high prices reflect optimism and have little to do with politics or even the real data that is available surrounding the economy. Producers and investors are optimistic that the worst of the Coronavirus Pandemic is over. Unemployment is still high but is below 7%. Family incomes are recovering, so spending is likely to increase. Oil, which is used to produce everything from gasoline to plastics and cosmetic products, will see an increase in demand as economic activity returns to normal.
However, some analysts have warned that the growth looks more like a speculative bubble rather than anything based on fundamentals. Yes, the economy is recovering, but experts, including representatives from the Federal Reserve and Department of the Treasury, have warned that it could take two more years or even longer for the economy to get back into a similar position that it was in March 2020, before the health crisis.
Some investment firms are predicting that the price could reach $100 per barrel, while others are more conservative with price targets close to $72. Whatever the outcome, investors should watch the growth closely, both for the opportunities provided and as a measure of confidence in America’s overall economic position.
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