Oil prices are poised to hit $100 per barrel this month, marking the first occurrence in 2023. This surge raised concerns about global inflation.
Rising oil prices pose a strain on the global economy. It will increase transportation and manufacturing expenses and put pressure on consumer spending, eventually leading to inflation.
The recent price increase follows a nearly 30 percent surge since June. It was driven by reductions in oil production in Russia and Saudi Arabia and growing demand from China.
At the beginning of this month, Saudi Arabia decided to prolong a daily reduction of 1.3 million barrels, totaling the combined cuts, until the year's end. It sped up the decrease in global oil inventories.
The International Energy Agency (IEA) cautioned last week that the continuous supply reductions enacted by two key OPEC+ leaders would result in a "substantial supply deficit." It represented a risk to the prevailing price instability.
The report came out one day after OPEC declared that the market was on the brink of a deficit exceeding three million barrels per day in the upcoming quarter. It could lead to the most significant supply shortage in over a decade.
Brent crude hits 10-month high
Last week, Brent crude — the benchmark for oil prices — reached nearly $94 per barrel, the highest in 10 months. It rose from its lowest point in June at $72 per barrel. This surge is also on track to be the largest quarterly increase since Russia's invasion of Ukraine.
The West Texas Intermediate, a lighter grade of U.S. crude, rose from $67 to $90 per barrel during the same timeframe. Both benchmark grades experienced approximately a four percent increase in value over the week.
In the U.S., taxes contribute a smaller share to the pump price. Gasoline prices surged by over 10 percent, reaching $3.90 per gallon.
In the U.K., gasoline and diesel costs increased moderately, resulting in a 10 pence per liter hike since June. According to the motoring organization RAC, the average price for unleaded fuel on Friday was £1.52 ($1.88) per liter, a rise from £1.43 ($1.77) per liter in June.
A surge in flight demand in the U.S., Europe, and, more recently, China has led to a more substantial rise in jet fuel prices monitored by the Energy Information Administration (EIA). By the end of August, prices averaged $3.07 per gallon, marking a 50 percent increase from a recent low of $2.05 in early May.
Concerns over peaking oil demand
Some analysts speculate that oil demand could peak in 2026 due to the swift transition to renewable energy that is already in progress.
Stephen Innes, managing partner at SPI asset management, indicated that oil's surge displays limited signs of slowing down. The increasing fuel expenses and the robust Chinese economy — the world's largest oil importer — complicate the outlook for central banks to bring down inflation rates that still exceed the two percent target.
The decline in oil prices contributed to the decrease in inflation during the first half of this year. It is now anticipated that an increase in oil prices will exert a restraining effect in the second half of the year and into 2024.
Moreover, central banks tamper with their interest rates to achieve the inflation rate target. For instance, the European Central Bank (ECB) raised interest rates for the tenth time last week and suggested that it might halt further increases. However, on Friday, policymakers indicated another rate hike was still possible.