FEATURE: Energy costs to test Biden in 2022 after inflation hits 39-year high in 2021

The Biden administration will continue to face pressure from high energy costs, particularly gasoline, ahead of the November midterm elections, as US inflation reached levels not seen since 1982.

Energy costs remained the top driver of inflation in 2021, rising 29% from 2020. Gasoline costs surged 50%, and fuel oil costs jumped 41%, according to Jan. 12 data from the US Bureau of Labor Statistics. Overall US inflation rose 7% in 2021.

Bob McNally, president of Rapidan Energy Group, said the Biden administration would feel compelled to respond if Brent stays above $85/b.

An overnight crude price rally accelerated midmorning Jan. 12 on the heels of a larger-than-expected drawdown in US inventories.

NYMEX February WTI settled $1.42 higher at $82.64/b, and ICE March Brent finished up 95 cents at $84.67/b.

SPR impact fades

The Biden administration Nov. 23 announced the offer of 50 million barrels from the Strategic Petroleum Reserve in a bid to ease prices, but the move encountered limited demand by refiners. Initial price declines seen in WTI crude -- a $12/b drop in the week after the SPR announcement -- have already been erased.

"If crude robustly breaks through [$85/b Brent], they'll probably do SPR again with no better results," McNally said, adding that he also expects consideration of a crude export ban to "come very much back on the table" despite assurances in December 2021.

Energy Secretary Jennifer Granholm said Dec. 14, 2021, that the administration had taken a crude export ban off the table after months of hinting that it was considering such a drastic move to respond to high prices.

Calls for reconsidering how much oil and gas the US ships onto the global market increased last year from Democrats, who argue the flows contradict the Biden administration's climate policy ambitions, as well as from industrial manufacturers paying higher energy bills.

The 2015 lifting of crude export restrictions transformed the US upstream sector and reshaped global markets. Likewise, surging US LNG exports are playing a significant role in the global supply crunch and geopolitics.

Pump price outlook

The Energy Information Administration raised its outlook for 2022 average regular-grade gasoline prices to $3.06/gal on Jan. 11, but it sees fuel prices drifting lower throughout the year and falling below the key $3/gal level by September.

Patrick De Haan, retail gasoline analyst at Gas Buddy, called EIA's latest 2022 prediction wishful thinking, given the tendency for US gasoline prices to rise steadily from February through May -- the start of peak summer driving season. He sees a national floor at $3.30/gal that could rise 35-85 cents/gal by Memorial Day.

"We're at high risk of $4," gasoline on a national average, he said.

$100/b oil chances

Some oil market experts see the possibility of crude prices spiking to $100/b in 2022 in response to a major supply disruption or geopolitical event.

Such a spike is not in S&P Global Platts Analytics' base case, but certain factors could change that outlook.

"By the second half of this year, the risks of low OPEC+ spare capacity, no Iran deal and a prolonged supply outage could be a bullish perfect storm for oil markets," Nareeka Ahir, Platts Analytics geopolitical analyst, said on the Capitol Crude podcast.

Helima Croft, head of global commodity strategy at RBC Capital Markets, said she is watching what happens on the Russia-Ukraine border as one major geopolitical story that could cause oil prices to spike. She said Moscow could respond to potentially "very severe sanctions" by "weaponizing energy exports."

After a major supply disruption, Croft said it would then become a question of whether the OPEC has enough "surge capacity" to fill the gap.

"Spare capacity is really only sitting in Saudi Arabia, in Kuwait, in UAE, potentially some in Iraq," Croft said. "And we've seen this in terms of the OPEC monthly 400,000 b/d production increases. They are struggling to meet those numbers, because a number of OPEC countries are already tapped out. There's just not a lot of gas left in the tank for the OPEC producers."

Dan Pickering of Pickering Energy Partners said OPEC likely views prices in the range of $65-$85/b as reasonable for 2022.

"I don't think they want oil above $100/b," he said. "But let's be realistic, there's a scenario where the oil markets take on a life of their own. Financial volumes in oil are significantly higher than physical volumes, and ... financial markets could spike crude and ignore OPEC."

Still, Pickering expects any move above $85/b to be short-lived.