Oil prices are on the cusp of hitting the $100 per barrel mark, and many experts predict that they might exceed this threshold within the current year. The implications of triple-digit oil prices are significant, potentially leading to higher inflation rates and a prolonged period of interest rate hikes by the Federal Reserve. However, some analysts offer a contrasting perspective, suggesting that the inflationary impact of oil may dwindle as supply aligns with demand later this year.
The surge in oil prices has already exerted upward pressure on inflation in the United States, primarily due to the escalating costs of gasoline. In the month of August alone, gasoline prices contributed to over half of the 0.6% monthly rise in consumer prices. Presently, the average price for a gallon of gasoline stands at $3.87, marking an increase of approximately 20 cents compared to the same period last year, as reported by AAA. Diesel prices are also on the rise, and their impact extends beyond the pump, affecting shipping costs and potentially leading to higher prices for various goods.
Nonetheless, Natasha Kaneva, the head of the global commodities strategy team at J.P. Morgan, suggests that the current oil price surge may be closer to its conclusion than its commencement. She points out, “After reaching our target of $90 in September, further price gains may be limited as we believe most bullish cues—both macro and micro—for the market have been exhausted for now.” Kaneva anticipates that oil prices will conclude the year at $86 per barrel.
Several factors have contributed to the recent oil price surge, including robust summer travel demand and China’s relaxation of Covid-19 restrictions. However, recent data suggests that these drivers may be losing momentum or reversing course. Kaneva notes, “Demand risks are shifting to the downside,” highlighting that high gasoline prices have led some consumers to reduce their driving. Furthermore, the strong start to the summer in the United States appears to have waned in July and August, with demand remaining lackluster in September. AAA even forecasts a gradual decline in gas prices in the upcoming weeks as demand subsides.
In addition to the United States, China’s demand growth also appears to be decelerating. Kaneva predicts, “While we see Chinese demand rising by 1 million barrels per day in the final quarter of the year compared to year-ago levels, demand will likely remain flat with third-quarter 2023 volumes.”
Contrary to concerns about oil-induced inflation, Citi analyst Alastair Syme suggests that major global inflation is unlikely to be driven by oil prices next year. He points to data indicating a potential oversupply in the oil market for 2024, with ongoing OPEC+ production cuts needed to balance against increasing non-OPEC supply amidst sluggish demand.
However, Syme does express apprehension regarding natural gas prices and their potential to impact global inflation in the coming year. Natural gas is vital for heating, industrial processes, and electricity generation, making it a critical factor affecting economies worldwide. Syme highlights the challenge of a 4% reduction in global gas supply due to the cessation of Russian sales to Europe, emphasizing the far-reaching consequences of disruptions in the natural gas market.
In conclusion, the current trajectory of oil prices and its implications for inflation and interest rates is a topic of ongoing concern and debate among analysts. While some anticipate a tapering of oil price increases later in the year, others emphasize the significance of factors like natural gas prices in shaping the global economic landscape. The situation remains dynamic, with various variables at play that will continue to influence the energy market and the broader economy.