Soaring Oil Prices Rekindle Inflation Worries: Here's What You Need to Know
Buoyed by OPEC+'s extension of production cuts, oil prices surged on Wednesday to their highest level since last November. $Crude Oil Futures(JUL4)(CLmain.US$ is now on the cusp of hitting $90 per barrel, while $Brent Last Day Financial Futures(JUL4)(BZmain.US$ is edging closer to $93 per barrel. Surging oil prices have rekindled concerns about inflation, as newly released August CPI data highlights gasoline as the most significant driver of price increases in the US.
1. Put Pressure on the Fed to Hike Rates Further
Since the second half of 2023, rising oil prices have consistently been a pain point for central banks. The CPI rose by 0.6% MoM in August, marking the largest gain since June 2022 and a significant increase from two straight months of 0.2% gains. Gasoline prices, which skyrocketed 10.6% in August, accounted for more than half of the CPI's overall rise and served as the primary driver of accelerating inflation.
With the current inflation rate still well above the Fed's 2% target, higher oil prices are putting further pressure on the Fed. Some analysts express concerns that the Fed may raise interest rates later this year.
Seema Shah, Chief Global Strategist at Principal Asset Management, remarked: "The inflation print likely is not enough to tilt next week’s Fed call towards a hike, yet it also hasn’t entirely cleared up the question of a November pause vs. hike."
Eugenio Aleman, Senior Economist at Raymond James said: "The decision for next week’s FOMC meeting will not be one to take lightly, especially because core CPI was higher than expected and because oil prices have continued to increase in September."
2. Raise Production Costs and Hurt Corporate Profitability
The impact of rising oil prices on a company's profitability can be multifaceted. In addition to increased production costs, companies may experience a reduction in profit margins due to higher expenses associated with raw materials and transportation, especially for the transport sector (e.g., freight forwarders and logistics companies) or other industries requiring large amounts of fuel. Moreover, products and services that require significant energy consumption, such as traditional automobiles or air travel, may experience reduced demand and revenue due to the upward pressure on oil prices.
The recent surge in oil prices is primarily due to tighter supply, as well as positive demand expectations from a stronger economic recovery in major economies. To support oil prices, Saudi Arabia and Russia have extended their plan to cut crude production by 1.3 million barrels per day from October to the end of this year.
Although an unexpected increase in U.S. crude inventories on Wednesday tempered expectations of tight crude supplies for the remainder of the year, the International Energy Agency (IEA) has warned that extending production cuts could lead to a significant market gap during Q4 and oil prices may hover at highs. Analysts at Bank of America believe that continued supply cuts could push Brent crude futures prices above the $100-a-barrel threshold by year-end.
"They have the instrument called supply cuts, which they can any time bring to the market and increase the oil price," said Mukesh Sahdev, the head of oil trading and research analysis at Rystad Energy.
Investors are currently the most bullish in oil. According to recently released data from the Commodity Futures Trading Commission (CFTC), the net long position in WTI crude oil has hit its highest level since June 2022.
Michael Tran, global energy strategist at RBC Capital Markets, said,“A considerable amount of dry powder had been sitting on the sidelines, meaning the recent strong tape could set off a further chase and catch-up in positioning.”
Source: Investing
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