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Oil prices back on the rise

Oil prices have risen, meaning drivers are paying more for gasolene and truckers and farmers more for diesel.

The increase also complicates the global fight against inflation and feeds Russia’s war chest. That poses problems for politicians as well as the people having to spend more to get to work, transport the world’s goods or harvest fields.

Above all, Saudi Arabia’s decision to cut back how much oil it sends to global markets has pushed prices higher.

The world’s second-largest oil supplier has slashed production by one million barrels a day since July and decided this month to extend the cut through the end of the year.

Russia, which is Saudi Arabia’s ally in the OPEC+ oil producers’ coalition, also extended its own cut of 300,000 barrels a month through 2023.

Simply, tighter supply means higher prices.

International benchmark Brent oil traded at just under US$94 per barrel Monday, up from US$90 before the extension on September 5 and from US$74 before the Saudi cut was first announced. US oil traded at around US$90.50, up from US$68 before the Saudi cut.

How high could oil prices go?

Some analysts think oil could hit US$100 a barrel based on robust demand and limited supply. But that’s far from the only view.

Oil prices can be volatile, and while they might briefly top US$100 in the coming months, they’re unlikely to stay there, said Jorge Leon, senior vice president for oil markets at Rystad Energy. He foresees prices in the low US$90s on average in the last three months of the year.

That’s still high historically, he said, supported by “resilient” demand for fuel to drive and fly.

The Saudi cuts were a unilateral move outside the framework of the OPEC+ alliance, meaning the kingdom can make changes as needed to quickly respond to shifting market conditions.

Leon said the Saudis will review the cuts each month – and could add barrels back if prices spike to levels that could seriously worsen inflation in countries buying oil. Excessive price increases could mean central banks worldwide hike interest rates further or keep them higher for longer.

“I don’t think it will be clever for the Saudis to push that hard,” Leon said. “The last thing you want to do is fuel inflation again with much higher oil prices. That’s going to kill economic growth, and lower growth is going to mean lower oil demand at the end of the day.”

Price drivers

A big question is demand for fuel, which is picking up along with rebounding travel following the depths of the COVID-19 pandemic. A robust United States economy increases demand for oil – and the price – while weak growth in China and Europe has the opposite effect.

“We see the upside potential for the oil price as being virtually used up and if anything envisage setback potential in view of the weak economy,” said Thu Lan Nguyen, Commerzbank head of commodities research who foresees oil at US$85 per barrel by year’s end. “The oil price is only likely to climb more lastingly once the economic outlook begins to brighten, which should be the case next year.”

Another factor is financial speculation, and it appears investors are piling into the oil market with bets that prices will rise.

“Much of the price surge beyond US$85 per barrel is due to a flood of speculative money, while fundamentally there is still plenty of oil in the world to meet demand for now,” said Gary Peach, oil markets analyst at Energy Intelligence.

Plus, more Iranian oil may come on the market as the United States “turns a blind eye” on enforcing sanctions to keep prices from rising further, Leon said. That could add 200,000 to 300,000 barrels a day.

Consumer impact

Costlier oil feeds through to higher prices for gasolene and diesel, especially in the US, where roughly half the pump price reflects the cost of crude – the rest is marketing, taxes and other costs.

Crude is a smaller share of gasolene and diesel prices in Europe because fuel taxes are much higher there.

Average US pump prices are still well below the record US$5 per gallon seen in summer 2022. But at US$3.85 per gallon, they’re still up 15 cents from a year ago. Oil costs are keeping gas prices high even as driving demand drops with the end of summer vacations and plentiful gasolene stocks, according to auto club AAA.

Diesel prices have risen as well, along with higher oil costs and refineries facing shortages of the specific kinds of crude best for making diesel. Refineries also are choosing to produce jet fuel instead, chasing profits as air travel rebounds. A gallon of diesel cost US$4.58 last week, up from US$4.34 a month ago.

That hurts farmers, who use a lot of diesel, and adds to the price of consumer goods transported by truck, which is pretty much everything.

Diesel supplies got even tighter last Friday after Russia said it would halt the export of refined oil products to hold down fuel prices at home.

Russia and politics

Oil is Russia’s main moneymaker, so higher prices help the Kremlin pay for its invasion of Ukraine and weather sweeping Western sanctions aimed at crushing its wartime economy.

The recent rise in oil prices, along with a cutback in the discount that sanctions forced Russia to offer Asian customers, means Moscow will earn “significantly more revenue from those exports,” said Benjamin Hilgenstock, senior economist at the Kyiv School of Economics.

The additional revenue could reach an estimated US$17 billion this year and US$33 billion next year, he said in an online talk hosted by the Brussels-based European Policy Center.

Russia has lost some US$100 billion in oil revenue following a European Union import ban and a US$60-per-barrel price cap imposed by the Group of Seven major economies, which bars Western insurers and shippers from handling oil priced above that level.

Russia, however, has increasingly found ways around the cap, including using a fleet of ghost tankers masking their ownership and origin of the crude they carry.

Any additional export earnings help support Russia’s currency and what it can import, including weapons components.

In the US, President Joe Biden has faced criticism from Republican lawmakers to encourage more oil drilling and scrap his support for electric vehicles.

But that criticism largely overlooks the rise in US oil production over the past year. The US Energy Information Administration reported that oil production averaged 12.8 million barrels a day in June, up one million barrels from 12 months ago, close to the levels achieved before the pandemic began in 2020.

Biden has said he considers oil production essential to keep the economy going as a bridge to a future with EVs and renewable energy.

Still, the White House views the oil market worldwide as being undersupplied, in line with recent OPEC data that indicates there will likely be a worldwide shortfall of three million barrels a day. The administration is also in touch with domestic and international producers on long-time supply needs, trying to ensure that the risk of higher oil prices does not disrupt economic growth.


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