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Tsvetana Paraskova

Tsvetana Paraskova

Tsvetana is a writer for the U.S.-based Divergente LLC consulting firm with over a decade of experience writing for news outlets such as iNVEZZ and…

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OPEC Has A Global Inflation Problem

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The rise in oil prices in recent months has been a concern to oil-importing nations and to retail consumers as the rally has been inflating their oil import bills and spending on motor fuel at the pump, respectively.

Now the higher oil prices have started to create concerns over how central banks around the world would tackle the higher fuel costs that boost inflation. Some policymakers could tighten monetary policy faster than planned to protect economies from quicker-growing inflation.

Yet, “a kneejerk reaction could sow the seeds of economic slowdown, oil demand destruction and another price crash,” Andy Critchlow, Head of Energy News in EMEA for S&P Global Platts, wrote last week.

OPEC—whose production cut pact with a dozen of non-OPEC producers led by Russia has already brought global oil inventories down to their five-year average—can’t afford to see oil demand destruction because it was the stronger-than-expected (and still strong) global demand growth that has greatly helped the cartel in achieving the ‘five-year average’ target.

Because of rising prices, the International Energy Agency (IEA) lowered earlier this month its estimate for 2018 global oil demand growth by 40,000 bpd to 1.4 million bpd—the first such outlook revision this year explicitly pinned to higher oil prices. Related: Are We About To See Another Correction In Oil Prices?

OPEC has started jawboning oil prices downward, with reports at the end of last week that the leaders of the pact—Saudi Arabia and Russia—are already considering boosting production to address possible supply shortages. Reporting the highest-ever pact compliance at 152 percent for April, OPEC said on Friday that it “pledges to address consumer anxiety over security of oil supplies.”

Russia’s Energy Minister Alexander Novak said on Friday that the oil market has in fact balanced, and the time has come for the parties to start seriously thinking how to exit the agreement. Everyone agrees that the question needs to be discussed in Vienna in June where various options will be put up for negotiations, Novak said, noting that it would be a gradual exit to ensure that the market is neither destabilized nor overheated.

Although talk of potential easing of the cuts continues to grow, inflation across the world will be boosted at least in the summer months by higher gasoline prices and higher energy prices in the global economies.

In the UK, gasoline prices have surged by 30 percent since 2016, and although the latest inflation figures show consumer prices unexpectedly falling, this is “likely to be a short-lived respite,” S&P Global Platts’ Critchlow argues.

In the United States, national average gasoline prices approached $3 per gallon ahead of Memorial Day weekend, the highest price ahead of the Memorial Day weekend since 2014, the EIA says, and expects regular gasoline prices during the summer season—April through September—to average $2.90 a gallon this year, which would be 49 cents higher than last summer.

“In their discussion of the outlook for inflation, a few participants also noted the risk that, if global oil prices remained high or moved higher, U.S. inflation would be boosted by the direct effects and pass-through of higher energy costs,” the Fed said in the minutes from its May 1-2 meeting. Related: The Oil Major Wall Street Won’t Back

The Fed is expected to continue raising interest rates at least two more times this year. But higher interest rates would mean higher borrowing costs for the many small independent U.S. shale oil producers who are much more dependent on debt and loans to finance their business operations than the big oil companies.

“One of the aspects of the shale revolution is that the oil market I think is more open and more exposed to credit market flows now going forward than it was in the past because of the increase of this huge number of small, heavily geared, producers working with the Lower 48,” BP’s group chief economist Spencer Dale—who is a former member of the Bank of England’s rate-setting Monetary Policy Committee—said in an interview with S&P Global Platts.

The recent oil price rally—fueled by geopolitical concerns in a market tightened by OPEC’s cuts—has started to work against the inflation and rate policies expectations of the key policy makers. A month ago, OPEC and friends were saying that the cuts would be in place until the end of the year. Now the cartel’s thinking seems to have changed, and OPEC and allies are hinting at an easing of the cuts to “stabilize” oil prices.

By Tsvetana Paraskova for Oilprice.com

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