Surging Global Crude Oil Prices: Unraveling the Reasons behind Sharp Increase – Update

Crude oil prices have been rising sharply across the globe, and it has raised fresh concerns about the impact it will have on the world economy, especially as many nations continue to grapple with high inflation.

On Monday, crude oil prices rose further as markets expect major producers to further tighten supplies. Another reason why crude oil prices gained was due to growing hopes that the US Federal Reserve would leave interest rates unchanged to avoid dampening the US economy.

Brent Crude November futures were up 3 cents at $88.58 a barrel at around 8 am, while US West Texas Intermediate crude (WTI) October futures rose 9 cents to $85.64 a barrel.

Supply tightening by OPEC+

Sugandha Sachdeva, executive vice president and chief strategist at Acme Investment Advisors told news agency Reuters that crude oil prices have been primarily driven by the anticipation of additional supply cuts from major oil-producing nations.

“Crude oil prices have been primarily driven by the anticipation of additional supply cuts from major oil-producing nations, Russia and Saudi Arabia,” said Sachdeva. He, however, noted that the steady increase in US oil production could limit further significant gains in price.

It was on Thursday last week that Russian Deputy Prime Minister Alexander Novak confirmed that the country had agreed with partners in the Organization of the Petroleum Exporting Countries (OPEC) on the parameters for continued export cuts.

It is likely that OPEC+ will make an announcement on the planned cuts this week.

Russia had said earlier that it would cut exports by 3,00,000 barrels per day (bpd) in September, following a 5,00,000 bpd cut in August. Meanwhile, Saudi Arabia is also expected to cut exports by 1 million bpd in October.

Impact of China, US economic data

Another factor that has led to a rise in crude oil prices is related to China and US economic data.

China’s manufacturing sector showed a surprising expansion in August, according to Caixin’s manufacturing PMI survey data. This unexpected growth has sparked fresh optimism about the economic well-being of the world’s biggest oil importer.

In the United States, Friday’s employment data surpassed expectations, revealing a gain of 187,000 jobs last month in the nonfarm sector. This broader slowdown in the U.S. labor market, marked by a deceleration in job growth, has diminished the likelihood of imminent interest rate hikes by the Federal Reserve, according to analysts.

Impact of rising oil prices

Rising global crude oil prices have widespread economic implications, impacting inflation, consumer spending, business costs, energy bills, global trade, government budgets, investment markets, and geopolitical stability. As oil prices surge, consumers face higher fuel and energy costs, potentially leading to increased inflation and reduced discretionary spending.

Businesses across various industries may experience rising operational expenses, affecting profit margins and potentially leading to job cuts.

Geopolitical tensions in major oil-producing regions can exacerbate price fluctuations, while higher oil prices can also drive investment in alternative energy sources. Policymakers closely monitor these developments and may take measures to mitigate their economic impact.