Output Cuts Leading To Price Hikes

A near-continuous surge in oil prices has driven benchmark Brent crude close to the $100 per barrel mark, presenting a fresh challenge for central banks as they grapple with rising inflation.

  • This upward trajectory represents a triumph for Saudi Arabia, which aimed to boost prices to support its planned economic diversification away from oil dependency.
  • Russia, which relies on energy revenue to fund its war in Ukraine, and partnered with Riyadh to curtail oil supplies, is also a main beneficiary of these price hikes. These two nations ignited the price rally earlier in the month when they announced their intention to limit supplies until the year's end.

Record levels of oil demand, driven by unexpected economic resilience, have outpaced production capacity. Consequently, traders and petroleum refiners are depleting oil inventories at a rapid pace. Many analysts anticipate further increases in crude oil prices, which could contribute to higher fuel costs, accelerated inflation, and potentially, elevated interest rates.

Supporting Inflation

The Federal Reserve is anticipated to keep interest rates unchanged on Wednesday while remaining open to future hikes. The central bank excludes volatile energy markets when determining borrowing costs. Nevertheless, the surging oil prices indirectly contribute to inflation in other goods and services. This could bolster price pressures while simultaneously slowing down the economy, a scenario that both the Fed and investors hope to avert.

  • Brent crude futures, the international energy benchmark, are on course to rise by 26% this quarter, having reached around $95 per barrel.
  • On Tuesday, they registered a 0.4% increase, putting them on track for a four-day streak of gains and marking rises in 13 of the last 16 trading days. West Texas Intermediate futures, the U.S. benchmark, have surged by 29% this quarter, reaching just over $91 per barrel.
  • Gasoline prices have soared to a national average of $3.88 per gallon in the U.S., according to AAA, up from $3.68 a year ago. Gasoline costs rose by nearly 11% from July to August alone, as reported by the Bureau of Labor Statistics, contributing to over half of overall inflation. Diesel prices have also surged, especially in Europe, where refiners face shortages of diesel-rich Saudi and Russian crudes.

Cuts Could Boost Longer Term Output

Edward Morse, a prominent oil analyst at Citigroup, suggested that Brent could briefly exceed $100 per barrel, but he also predicted that higher prices would likely lead to lower prices in the following year by stimulating increased production and reducing demand. He noted that Saudi Arabia could increase supplies if prices climbed too high.

  • Analysts speculate that China, where refiners have accumulated inexpensive Russian and Iranian oil throughout the year, may alter its approach by reducing imports and increasing exports now that prices are on the rise.
  • In the U.S. shale sector, oil and gas producers are deploying new drilling rigs at the fastest rate since the previous November, according to Baker Hughes.

In a stock market characterized by fluctuations over the past three months, crude producers and oil-field service companies have stood out. The S&P 500 energy sector has risen by nearly 15% during this period, surpassing the performance of all other sectors.


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Photo by Zbynek Burival / Unsplash.