Three consecutive weeks on the rise and new annual highs. The barrel of Brent was already around 95 dollars yesterday, the highest level since the months before the outbreak of the war in Ukraine. A price that has not been seen since November 2022 and that has increased by 30% in just three months. Some analysts, such as those at Goldman Sachs, as well as the oil company Chevron, openly say that the psychological level of $100 will soon be exceeded.
In the current situation, this increase could be very harmful. Indeed, a rise in energy prices could once again increase inflation in Western countries and force central banks (mainly the European Central Bank and the US Federal Reserve) to continue raising rates, which could further depress the consumption and investment.
“The increase in the price of oil is clearly another blow for central banks. While we know that the increase is not the only factor to consider when analyzing inflation, the impact on economic data is immediate. And it’s not very convenient when you’re dependent on the data…”, Mirabaud analysts commented in a note.
How we got here? “The demand for oil has grown a lot this year. Despite rising interest rates in the West and despite China’s macroeconomic problems, oil consumption data show that demand is strong. When we look at the mobility indicators, for example, road traffic around the world has recovered the level of 2019 and aviation, despite being below the pre-covid level, has grown significantly this year”, explains Jorge León, vice president of the consultancy Rystad Energy.
“Despite the fact that industrial activity and the Chinese real estate sector are weak, transport trends remain quite positive. In addition, China has continued to build up oil inventories for months and its refineries have been operating at full capacity, which has brought crude imports to a near-record level,” noted Francisco Blanch of Bank of America.
There is an important divergence of opinion between producers and consumers. While the International Energy Agency earlier this month suggested that demand could peak before 2030, the Cartel of Petroleum Exporting Countries (OPEC) does not believe this will happen. “It is a risky and impractical narrative to think that fossils are near their end. These calls to the peak have never materialized”, rebutted the oil cartel. For this reason, OPEC has no qualms about announcing new production cuts, which allows its members to increase budget revenues after the pandemic.
“The voluntary cuts of one million barrels per day by Saudi Arabia, initially proposed for July and then extended until the end of the year, have reduced the world supply of crude oil,” recalls Jorge León. A market deficit estimated at 3 million barrels per day. And Western countries also do not have reserves to compensate for this mismatch, because global inventories have fallen to a 13-month low.
