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Key points to remember
- OPEC+ just announced the biggest cut in oil production since the start of the pandemic, and it will push energy prices higher during a period of soaring inflation.
- The Russian attack on Ukraine had serious economic repercussions around the world, as energy prices rose due to sanctions against Russian oil.
- The White House has stated the importance of not relying on foreign fuel sources and stressed the importance of developing clean energy sources.
Oil prices have had a choppy few years thanks to everything going on in the world. From a global pandemic that lasted more than two years to a war that began earlier this year, these historic events have caused oil prices to fluctuate as we have seen them plunge into the negatives at the start of the pandemic, then earlier this year increase to $140 per barrier.
OPEC+ recently announced it is cutting oil production as the world continues to grapple with rising inflation. Let’s take a look at what is happening with oil prices in 2022, because many people are wondering what influenced them.
What’s going on with oil prices?
It is difficult to identify the most important problem currently facing oil prices. Let’s take a look at some of the major factors currently influencing oil prices around the world.
The Ukrainian War
The Russian war in Ukraine drastically cut off oil supplies, including sanctions against Russia. When Russia first attacked Ukraine, oil prices skyrocketed from around $76 a barrel at the start of the year to over $110 a barrel on March 4, 2022. The United States then announced a ban on Russian oil on March 8. which has driven domestic energy prices to astronomical levels.
The Russian invasion of Ukraine has reconfigured the world oil situation. With the US ban on Russian oil, Russia shifted from Europe to customers in India and China. With the ongoing war in Ukraine, sanctions against Russia continue, which will further force a reconfiguration of the world’s oil supply.
OPEC+ reduction
On October 5, OPEC+ announced that it would cut oil production by two million barrels per day. OPEC+ announced that it was cutting oil production for purely economic reasons and nothing else.
Critics have spoken of how the reduced production will raise global oil prices, bringing more revenue to Russia as it continues the war in Ukraine. Despite all Western sanctions, Russia can still finance its war against Ukraine by exporting oil.
Given that the world consumes about 100 million barrels of oil per day, eliminating two million barrels per day will have a significant impact on oil prices at a time when inflation is soaring and consumers are in the face of interest rate hikes intended to slow the economy.
Relations with Saudi Arabia
Many believe the move is short-sighted as the world continues to grapple with rising energy costs. President Joe Biden has threatened consequences for Saudi Arabia as tensions mount. The White House is disappointed with these oil cuts, and Biden will consult with Congress to see what steps can be taken without mentioning specifics. It is clear that Saudi Arabia is not worried about these consequences since it was warned several times before announcing the cut.
Oil prices during Covid and the Covid recovery
When the pandemic hit, most of the world was in lockdown, which meant people were very suddenly driving less. With people reluctant to even leave their homes and offices closed, demand for oil has plummeted. These shutdowns also meant that people weren’t traveling as much by public transport, planes, etc., so the demand for oil fell sharply in these industries.
Global shutdowns and travel restrictions meant the world suddenly had more oil than it needed. As storage facilities and tankers began to fill up, concerns about where to store all that oil led to negative benchmark prices between April 20 and April 22, 2020.
This led to a decrease in oil production to match the drop in demand due to the pandemic. Companies had to either slow down oil production or shut it down altogether.
Then, when restrictions eased globally, consumers were ready to start driving and traveling again. The demand for oil exceeded the supply and the oil companies could not keep up, not at first. This has led to a further increase in oil prices as oil companies strive to increase supply to meet the new demand. The sudden surge in demand after the pandemic drove up the prices of everything, further ensuring that inflation would not be transitory.
Industries impacted by high oil prices
Oil prices impact many industries as fuel is required for many business operations. So when oil prices rise, consumers feel it with rising fees. Here are the industries most affected by rising oil prices.
Airlines companies
Airlines are feeling the impact of rising oil prices as they depend on this resource for their core business. The result in a situation like this is that consumers feel the adverse effects of more expensive airline tickets.
Transportation
Airlines are not the only means of transport affected by the rise in oil prices. Rail, transit, shipping, and everything else in this industry is getting more expensive because it costs more to transport people.
Logistics and delivery services
When fuel costs more, it impacts all logistics or delivery service companies as they have to spend more money to move goods across the country. When you hear about supply chain issues, it’s often related to labor shortages or the increased cost of performing the same task.
Rising energy prices contribute to the increase in the price of almost all goods, which pushes inflation even higher because everything costs more.
What future for oil prices?
Prior to October 5, many experts were predicting that oil prices would remain flat for the rest of 2022 as inflation concerns impacted consumer spending. Oil prices also tend to fall during a recession with less money circulating in the economy.
The OPEC+ decision will certainly drive up oil prices at a time when everything already seems too expensive. Since crude oil prices are controlled by supply and demand, a reduction in supply will have a noticeable effect. The other factors at play with crude oil prices are inventories and market sentiment, which we have to wait to see unfold as we have yet to see what will happen with continued rate hikes.
The next OPEC+ meeting is on December 4, and then we’ll see if they backtrack on that decision due to the possible consequences from the United States.
Rising oil prices will also naturally increase demand for cleaner energy as consumers look to save money. It’s no secret that turning to solar power or other renewable energy sources would also reduce our dependence on other countries.
In a statement released by the White House, this message emerged:
“With the passage of the Cut Inflation Act, the United States is now poised to make the largest investment ever to accelerate the transition to clean energy while increasing energy security, by increasing our reliance on clean energy and energy technologies made and produced in the United States. ”
How should you invest?
All this news about rising oil prices is enough to affect earnings, which certainly has investors worried. While some energy stocks are having record years, there is no shortage of volatility in the stock market as a whole. Nor can we forget how soaring inflation is still a problem as the Fed looks to continue the rate hikes that many analysts believe will tip the economy into a full-blown recession.
The OPEC production cut has already had many repercussions for investors. The global benchmark for oil prices is the Brent Crude futures contract, and volatility has certainly increased there.
Many experts also agree that soaring inflation will invariably get worse if fuel prices rise again. With Q.ai’s Inflation Kit, you can overturn those inflation fears with an investment kit that aims to take advantage of higher inflation. With the unique portfolio protection feature, you can further protect yourself against potential market declines.
Conclusion
Many unique and unforeseen factors have caused oil prices to fluctuate this year. Even though the world is slowly moving towards cleaner energy, we still need to pay attention to what’s happening with oil prices around the world, as they impact almost every aspect of our daily lives. With fears of a global recession looming over us, many experts are concerned about the impact of rising oil prices, as energy supply shocks have historically caused major economic problems.
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