Crude oil rose 0.5% to trade at $91.86 a barrel, on pace for the highest settle since August 2022. Oil is at 10-month highs as Saudi and Russian production cuts tighten supply. Rising oil prices are the next challenge for the Fed's battle against inflation.
.jpg)
An almost uninterrupted rise in oil prices has pushed benchmark Brent crude close to $100 a barrel, posing a new challenge for central banks in their battle against inflation.
The rise is a victory for Saudi Arabia, which sought to bolster prices to fund a planned transformation of its oil-dependent economy. Russia, which depends on energy income to finance its war on Ukraine and joined Riyadh in slashing supplies, is another winner. The two countries sparked the rally early this month when they said they would restrict supplies until the end of the year.
Record levels of oil demand—fueled by unexpected economic strength—have outstripped production. As a result, traders and petroleum refiners are draining oil stockpiles at a rapid clip. Many analysts expect crude prices to keep rising, which would feed into higher fuel bills, quicker inflation—and, potentially, higher interest rates.
The Federal Reserve is expected to hold rates steady on Wednesday while leaving the door open to further increases. The central bank excludes volatile energy markets when it sets borrowing costs. But surging oil prices trickle into inflation of other goods and services. That could prop up price pressures while slowing the economy—the scenario that the Fed and investors hope to avoid.
.jpg)
Brent crude futures, the international energy benchmark, are on track to rise by 26% this quarter having climbed to about $95 a barrel. On Tuesday, they added 0.4%, putting prices on track for a four-day streak of gains and rises in 13 of the past 16 trading days. West Texas Intermediate futures, the U.S. benchmark, have jumped 29% this quarter to just over $91 a barrel.
“This clearly risks pushing…inflation slightly higher again,” said David Fyfe, chief economist at commodities data firm Argus Media. “It is something that may encourage, through the end of the year, further interest-rate hikes.”
Gasoline prices have jumped to a national average of $3.88 a gallon in the U.S., according to AAA, from $3.68 a year ago. Gas costs rose almost 11% from July to August alone, according to the Bureau of Labor Statistics, driving more than half of overall inflation. Diesel prices have hurtled up, particularly in Europe. Refiners there are starved of diesel-rich Saudi and Russian crudes.
Oil prices sagged for much of the year until Saudi Arabia cut daily output by a million barrels in July. The world consumes just over 100 million barrels a day. The reduction came on top of broader output cuts by the Organization of the Petroleum Exporting Countries and its Russia-led allies.
Russia rowed in behind Saudi Arabia, saying it would lower exports by half a million barrels each day in August. Moscow and Riyadh jolted the market again on Sept. 5, extending the curtailments until the end of 2023.
Saudi Energy Minister Abdulaziz bin Salman on Monday said the OPEC+ cartel sought to reduce volatility and make energy markets more predictable.
“OPEC conduct is nothing different from what a central bank, or a group of central bankers, is doing,” Abdulaziz said, describing the cuts as soft-touch market regulation.
A knock-on effect of the cuts: Russian oil and fuel prices have risen far above caps imposed by the U.S. and its allies as part of energy sanctions. The country’s main flavor of crude, Urals, trades at $82 a barrel, according to Argus. The cap set by the U.S. is $60.
One of Wall Street’s most bearish oil analysts, Edward Morse of , said in a note that Brent could surpass $100 a barrel for a short while. But he said higher prices now make lower prices likely next year by encouraging higher output and denting demand. Saudi Arabia could boost supplies if prices get too high, he added.
Analysts say China, where refiners have stocked up on cheap Russian and Iranian oil for much of the year, could switch tack to a policy of lower imports and higher exports now prices are on the rise. In the U.S. shale patch, oil and gas producers are standing up new drilling rigs at the fastest rate since last November, according to .
✓ Crude producers, oil-field service firms and fuelmakers stood out in a stock market that has wavered over the past three months. The S&P 500 energy sector has risen nearly 15% over that period, more than double the next best-performing sector.
One sign refiners are fighting for tight supplies: The spot market for oil fetches a big premium to forward prices. Investors who have snapped up oil can earn easy money from adjusting positions when longer-dated futures trade at a discount.
Some firms’ trading algorithms have amplified the move by following the trend toward higher prices and adding to their positions. “As prices rise, it kind of becomes a self-fulfilling prophecy,” said Charlie Macnamara, head of commodities at U.S. Bank.
✓✓ For oil consumers outside the U.S., crude’s advance is particularly problematic. Crude prices are typically denominated in dollars, and the greenback has strengthened since mid-July. The Reserve Bank of India said on Monday that the oil-price rise poses a risk to global financial stability and threatens to juice inflation unless an economic downturn knocks energy demand.
Giovanni Serio, head of research at giant oil trader Vitol, said stockpiles are currently shrinking at a pace of nearly 2 million barrels each day. One of the reasons is that demand in China has been stronger than its weak economy would suggest. But there may be relief ahead. Serio expects higher output in North and Latin America to bring global production and demand more into balance in the fourth quarter.
For now, oil-intensive companies such as airlines say rising prices will eat into profits. “Fuel is up 30% since early July. It has been volatile all year,” Chief Financial Officer Daniel Janki said last week after the company cut its quarterly earnings forecast.
No comments:
Post a Comment