When the price of oil goes up, the price of everything else goes up. This is a near-universal rule because virtually all goods and services involve the use of oil at some point in the supply chain that takes them from producer to consumer.
The most unfortunate consequence of this rule is that when economies find themselves in an already precarious situation, rising oil prices in terms of inflation is the last thing they need. And yet, rising oil prices are exactly what the struggling American and European economies are currently experiencing. And it could get worse.
The latest U.S. Consumer Price Index showed a 3.5% increase for March on an annual basis. The figure was higher than expected and immediately ended talk by Fed officials that the coming months could see the start of rate cuts after a long series of hikes aimed at curbing the latest worrying inflation surge that has followed the pandemic and the start of the crisis. of the war in Ukraine, marked by a surge in oil prices.
Following the publication of the CPI report, oil prices fell. It is the natural reaction of traders to sell when they detect bad inflation news. But that won’t solve the supply problems flagged by a growing number of analysts. OPEC too.
The cartel published the latest edition of its monthly oil market report on Thursday, leaving its demand forecasts unchanged for this year and next: for this year, OPEC expects demand growth of 2 .25 million b/d. For next year, growth is expected to moderate to 1.85 million bpd. OPEC oil demand was estimated at just over 28.5 million b/d this year and 29 million b/d in 2025.
If these figures turn out to be close to real demand growth, the world will very soon tip into a deficit: the latest OPEC production figures stand at a total of 26.6 million b/d, which which is well below the projected demand figure for 2024.
This now leaves a gap of almost 2 million b/d to be filled by non-OPEC supply, but this is not going to happen according to the US Energy Information Administration, which recently released updated its production forecast for the year and saw it at 280,000 b/d. This figure is 20,000 b/d higher than last month’s production growth estimate, but it is still far from enough to offset OPEC’s forecast shortfall. And no other producer can do this.
That means the Federal Reserve’s decision to delay the start of rate cuts will last longer than many should have hoped. It also means the European Central Bank’s decision to keep interest rates in the eurozone unchanged at the record high of 4%, even though inflation in March surprised positively, down to 2.4% from 2 .6% in February.
If the ECB was reluctant to start cutting rates with an inflation rate of 2.4% in a month when energy prices were falling, it is likely that it would be even more reluctant to start cutting. reduce rates when energy inflation increases. And this will increase, with the deficit which threatens the oil markets and, in particular for Europe, that of gas as well, while the Russian attacks against the Ukrainian gas storage sites remind Brussels that the end of the problems of gas prices may not be permanent.
Geopolitical developments in the Middle East don’t help either. Bloomberg stoked fears of an attack on Iran on Thursday by citing unnamed sources saying the United States and its allies viewed the attack as imminent, likely to occur in the coming days. According to the report, the attack would likely choose a military rather than a civilian target in Israel, the sources also said.
However, not everyone is convinced this will happen. Energy analyst Neil Atkinson recently told Al Jazeera that it was actually unlikely that Iran would respond to the Israeli strike on the Damascus consulate in Tehran with a direct attack on Israel. Iran is playing the long game, Atkinson said.
Even without a breakup between Iran and Israel, the balance of the oil markets does not seem bearish as far as prices are concerned. The International Energy Agency releases its own monthly oil report today and may attempt to counter growing shortage fears with its forecast for demand growth. On the other hand, it could revise it upwards again, which would further strengthen prices.
Analysts like to point out that high inflation kills oil demand. What they rarely mention these days is that this demand destruction is always limited, because oil is an essential commodity for any relatively industrialized economy on the planet. In other words, the disappointment over the interest rate cut that sent benchmarks lower earlier this week isn’t going to last very long as oil demand has repeatedly proven more resilient than many had expected it – and hoped for it.
By Irina Slav for Oilprice.com
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