Daily Management Review

OPEC is afraid of the global inflation growth


05/29/2018


The rise in oil prices in recent months is of great concern to oil-importing countries and retail consumers, as they have to spend much more money for the import of hydrocarbons and the purchase of gasoline at gas stations, respectively.



So far, it is not clear how the leading central banks will react to inflation provoked by the increased energy prices. Some mega-regulators may begin to tighten their monetary policy faster than planned to protect economies from rising prices.

"However, an impulsive reaction can sow the seeds of economic slowdown, lower demand for oil and another collapse in prices," Andy Critchlow is Head of Energy News in EMEA for S&P Global Platts wrote last week.

OPEC, whose agreement with a dozen oil-exporting non-member countries to cut production has already reduced world oil reserves to an average five-year level. Yet, it cannot allow high prices to slow the global growth in oil demand.

Because of the price spike, the International Energy Agency (IEA) lowered its forecast for growth in world oil demand in 2018 by 40,000 barrels per day to 1.4 million barrels a day (the first downward revision year).

OPEC began talking about the need to reduce oil prices, and at the end of last week it became known that the initiators of the agreement - Saudi Arabia and Russia - are already considering the possibility of increasing production to eliminate the potential shortage of supplies. In a statement released on Friday, OPEC said that the cartel "is committed to respond to consumer concerns about the safety of oil supplies."

Despite the fact that calls for a softening of the OPEC + agreement sound louder, inflation in the world will continue to grow (at least in the summer months) due to high gasoline prices and higher energy prices in global economies.

In the UK, gasoline prices have risen 30% since 2016. Although the latest inflation data shows that consumer prices unexpectedly fell, this is "probably a short-term respite," says Critchlow of S&P Global Platts.

In the United States, the average price of gasoline has approached $ 3 per gallon, the highest figure on the eve of the holiday weekend to Memorial Day since 2014, according to the Information and Analytical Department of the US Department of Energy.

It is expected that the average price for gasoline with an octane rating of at least 8 during the summer season (April to September) is $ 2.90 per gallon, which is 49 cents more than last summer.

"If world oil prices remain high or rise even higher, US inflation will grow because of high energy costs," the Fed said on May 1-2.

It is expected that the Fed will raise the interest rate at least two more times this year. But higher interest rates make loans more expensive for small independent shale oil producers in the US, which are much more dependent on borrowed funds than large oil companies.

A month ago, OPEC and its friends said that the reduction will continue until the end of the year. Now the position of the cartel seems to have changed, and OPEC and Russia make it clear that they are willing to soften the agreement to stabilize oil prices.

source: bloomberg.com






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