Fear of Global Inflation Increases as Oil Prices Rise Towards $100 Per Barrel

• Financial

Oil prices have been steadily climbing, and the market is abuzz with speculation as the price per barrel teeters on the brink of hitting $100 this September. Such a significant milestone hasn't been witnessed since the beginning of 2023.

Much of this rise—almost 30% since June—can be attributed to a reduction in output by major oil producers like Russia and Saudi Arabia, combined with an insatiable demand from China. Last week, Brent crude, the global oil benchmark, scaled a 10-month high of nearly $94 a barrel, marking a significant leap from its June low of $72.

This trajectory, signifying its most substantial three-month gain, parallels the tumultuous period following Russia's invasion of Ukraine. The American counterpart, West Texas Intermediate, followed suit, escalating from $67 to $90 in the same timeframe.

These surges weren't isolated; both benchmarks saw a 4% rise within a week. The effects of these trends aren't limited to stock market charts; they're palpable at the pump. In the UK, the costs of petrol and diesel have seen a modest surge.

As per the motoring organization, RAC, the average price of unleaded fuel saw a hike, reaching £1.52 a liter recently, compared to £1.43 in June. Across the Atlantic, the US has experienced more than a 10% spike in gasoline prices, hitting $3.90 a gallon.

The Global Domino Effect

The uptick isn't limited to road fuels. With increased demand for air travel in regions like the US, Europe, and China, jet fuel prices have witnessed a staggering 50% rise, moving from $2.05 per gallon in early May to $3.07 by the end of August, according to the Energy Information Administration (EIA).

But what's the reason behind this surge? A pivotal move came earlier this month when Saudi Arabia extended its reduction in oil production by a substantial 1.3 million barrels per day, effectively shrinking global supplies.

Russia's supply cuts, in tandem with other OPEC countries' strategies, are making the $100 a barrel price point look increasingly achievable. The International Energy Agency (IEA) raised alarms about the sustainability of these measures.

It posited that continued supply cuts from OPEC+ heavyweights might lead to a "significant supply shortfall", opening the gates to further price volatility.

The Road Ahead

The concern isn't limited to short-term price flux.

The IEA's prediction that oil demand will peak before 2030—and potentially even by 2026 given the swift transition to renewables—is a worrying forecast for Saudi Arabia and its Opec allies. Yet, as the world grapples with these dynamics, central banks are faced with an additional conundrum: managing inflation rates.

Earlier this year, falling oil prices provided some respite by dragging down inflation. However, the current surge might reverse this trend, potentially lingering into 2024. The European Central Bank, after its 10th consecutive interest rate hike, hinted that another might be on the horizon. Meanwhile, in the US, the Federal Reserve hasn't closed the door on a potential rate hike in November.