Now that crude oil futures are back above $50 per barrel, it’s clear that oil prices won’t stay low forever. The fact is that oil is a seasonal business. Every spring, demand soars as farmers fire up their tractors. Then in the summer, the demand for electricity rises.
Since many emerging markets rely on diesel or heating oil to generate electricity, the season surge in diesel prices has become more acute in recent years. That explains why diesel prices rose 65% last year, even though gasoline prices only rose 26%. The temporary lull in diesel demand has sent light sweet crude prices dramatically lower, but I don’t expect that last since the seasonal surge for diesel is imminent.
The rise in crude oil was caused when the United Arab Emirates, one of our allies in the Arab world, cut its February crude shipments by as much as 15%. This makes the UAE the first OPEC producer to reduce exports since OPEC agreed to its big production cut last month. This is a big deal since the UAE is OPEC’s third-largest producer. OPEC members are notorious for cheating on their quotes, but UAE’s big cut signals that the cartel may be serious this time.
The final factor driving oil prices higher is rising tensions in the Middle East. On top of this, Russia has cut off natural gas shipments to Ukraine again. This means that some of Russia’s European customers may run short of natural gas since much of their natural gas is transported through Ukraine. The important takeaway for us is that the new year has provided energy traders with lots of excuses to raise energy prices.