Living costs likely to increase following the rise of oil prices

Analysts warn that rising oil prices may deepen the current economic difficulties.

Nations who are heavily dependent on oil importing were caught off guard last week. It wasn't even 9am on Monday, April 3rd, when brent crude (the international oil benchmark), increased by 5.5% per barrel, putting the global economy on alert. This came one day after OPEC and its allies unexpectedly announced a production cut of 1.16 million barrels per day. 

The barrel price kept climbing throughout the same day, hitting $85 by Monday evening, almost 6.5% up. While the resulting price increases might take some time to filter through to the forecourts, it will certainly add to the difficult economic climate. To make matters worse, since China, India and several other countries still rely on Russian oil, this could also bolster Vladimir Putin's ongoing war against Ukraine. 

"It's a big deal. You could have a very significant price response", said Clearview Energy Partners' managing director, Kevin Book. "Even though the production cut accounts for only a small amount of the world's daily usage, the impact on prices could be big". 

"In a balanced market, if you take a small amount away, you could have a very significant price response, depending on what demand does", he added. 

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said: "The development comes as a blow for inflation, with expectations of inflation coming down partly balancing on the trajectory of the oil price. 

"Markets are aware that if the pressure continues, central banks will need to extend or strengthen their interest-rate hiking cycles, the expectations of which will need to be repriced." 

Dubai's deVere Group's chief executive officer, Nigel Green, seems to agree: "The dramatic cut will only add to pressing global inflationary squeezes. 

"The oil price rises can be expected to increase the cost of production and transportation, reduce consumers' purchasing power, disrupt supply chains, and lead to higher inflation expectations. 

"There's real concern that the surprise decision announced by Saudi Arabia for OPEC+ will prompt central banks to maintain interest rates higher for longer, due to the inflationary impact, which will hinder economic growth." 

Cuts were also announced by Iraq, United Arab Emirates, Kuwait, Kazakhstan, Algeria and Oman. Speaking on behalf of the group, the Saudi Energy Ministry argued that its cuts are a "precautionary measure" with the intent of stabilising the oil market. And as if that was not enough, Russia's deputy prime minister Alexander Novak said his country would extend a voluntary cut of half a million barrels until the end of 2023, an extension to what had been previously announced in February. 

In response, US President Joe Biden, who confirmed Saudi Arabia did communicate the decision prior to making it official, said he disapproves it vehemently. National Security Council spokesperson John Kirby verbalised Biden's feelings: "We don't think that production cuts are advisable at this moment, given market uncertainty. And we made that clear." 

It is worth mentioning again that high energy and fuel prices have helped to drive up inflation, putting even more pressure on households' finances. Yael Selfin, chief economist at KPMG, expressed her concerns regarding the issue: "The energy price cap, that households benefit from, has already been determined using earlier market expectations," she said. "Plus, when you look at energy use in households, it tends to be more gas-heavy rather than oil." 

Those who rely on public transportation also have reasons to be concerned. Questioned whether the price changes would affect transport costs, the RAC said: "Any sudden increase in the cost of oil shouldn't result in a rise in the UK average price of petrol for a fortnight, unless of course the barrel price stays higher for several days," spokesman Simon Williams said. 

And if developed nations are fearful, the impact on emerging economies could be even worse. Without the foreign currency capability to support fuel imports will be negatively impacted by the $100 price tag. Pavel Molchanov, managing director of private investment bank Raymond James, mentioned Argentina, Turkey, South Africa and Pakistan as potential economies that should be hit. 

Post Date: 12/04/2023

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