Since Saudi Arabia and OPEC+ crude oil producers announced additional production cuts of about 1.16 million barrels per day (bpd), there has been increasing concern that these efforts will affect U.S. consumers by adding to inflationary pressures, particularly at the pump.
U.S. oil prices had been trending lower since hitting a peak of $130 per barrel last spring, tumbling to as low as $67 last month.
“While heading into 2023, there were a lot of uncertainties, such as a drop in demand amid slowdown concerns, higher worldwide supplies, and a slower-than-expected reopening of China’s economy,” said Simon Wong, a market analyst at Gabelli Research. “The Saudi Arabia-led voluntary cuts helped ’stabilize oil prices.'”
Conditions in global energy markets have shifted, from OPEC countries slashing output to China importing enormous amounts of crude amid the economic reopening. The recent developments have boosted crude prices on the New York Mercantile Exchange and London’s ICE Futures Exchange.
West Texas Intermediate (WTI) and Brent crude futures have surged by roughly 20 percent in the past month, bringing prices above $82 and $86 per barrel, respectively.
“The price of energy will go up,” James Hill, CEO of MCF Energy, told The Epoch Times.
“This is a major cutback and significant with China coming out of their COVID lockdown and becoming a competitor for the current energy supplies.”
Many economists and market analysts revised their 2023 and 2024 price predictions upward following the voluntary cuts. Rystad Energy, for example, believes that prices could top $100 in the second half of this year.
The U.S. Energy Information Administration (EIA) also increased its average Brent spot price projections to $85.01 in 2023 and $81.21 in 2024.
“The higher price forecast reflects a forecast for less global production in 2023 and a relatively unchanged outlook for global oil consumption,” the EIA wrote in the April Short-Term Energy Outlook (STEO).
Industry observers concede that the White House would be unable to lower energy prices, even as the current administration keeps drawing down emergency stockpiles, according to Hill.
“Energy prices will continue to rise, and with the Strategic Petroleum Reserves [SPR] being drawn down to the lowest levels in decades, the administration’s ability to reduce prices by drawing down these reserves will be severely impacted,” he said.
Ultimately, there has been a shift in global energy markets, according to James Mick, managing director and senior portfolio manager with Tortoise.
Before the COVID-19 pandemic, the U.S. shale industry had been in control of oil prices. Today, OPEC is back in charge.
“OPEC wants and needs a higher price, and they are back in the driver’s seat to obtaining their wishes,” Mick said.
Could a Recession Prevent Higher Prices?
So could a recession prevent heightened price pressures from forming? This is the downside risk for international energy markets.“Despite our higher price forecast, recent issues in the banking sector raise the potential that economic and oil demand growth will be lower than our forecast, which has the potential to result in lower oil prices,” the EIA stated in its outlook.
“It should be noted that potential challenges to global economic development include high inflation, monetary tightening, stability of financial markets, and high sovereign, corporate, and private debt levels,” OPEC stated.
Wong concurs that many of the uncertainties related to demand remain, so he “would not be surprised if OPEC cut again later this year to support prices.”
But the tightness in worldwide supplies could leave global energy markets sensitive to potential supply shocks, according to Phil Flynn, a senior market analyst at The PRICE Futures Group.
OPEC kept its forecasts intact in the latest monthly report, anticipating that international crude demand will increase by 2.3 percent, or 2.32 million barrels, this year.
In the United States, gasoline consumption has trended upward since the beginning of the year.
Gasoline prices have taken notice and have been inching higher this year. The national average for a gallon of gasoline has climbed more than 13 percent since the start of the year, topping $3.64 on April 13, according to the American Automobile Association (AAA).
It’s estimated that crude prices account for half of the price tag at the pump.
But how much could gasoline prices rise in the coming months?
Overall, rising oil prices could reignite the inflation threat. International Monetary Fund models show a 0.3 percentage point increase in inflation for every 10 percent jump in oil prices.
Could the next Consumer Price Index report in April show a reversal in energy price trends?