Higher Oil Prices Expected to Revive Inflation Pressures, but Can a Recession Stop It?

Pump jacks operate at sunset in an oil field in Midland, Texas, on Aug. 22, 2018. (Nick Oxford/Reuters)

News Analysis

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.

“There is a broadly held view that a tighter oil market is on the way, reflecting an anticipated rise in air traffic and Chinese demand in the second and third quarters,” Rystad CEO Jarand Rystad wrote in a note. “In addition, despite tightening monetary policies in advanced economies, lingering excess money supply will continue to support the purchasing power of oil consumers.”

Goldman Sachs raised its price forecasts for Brent, the international crude benchmark, by $5, to $95 per barrel this year, and $3, to $100 next year. Capital Economics bolstered its end-2023 and end-2024 forecasts to $90 and $80, respectively.

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.

The SPR tumbled for the second consecutive week, sliding below 370 million barrels for the first time since November 1983. Since January 2021, the nation’s emergency inventories have plunged by more than 42 percent to 369.575 million barrels.

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.

An OPEC flag is seen on the day of an OPEC+ meeting in Vienna on Oct. 5, 2022. (Lisa Leutner/Reuters)

This year, domestic oil output has been flat, ranging between 12.2 million and 12.3 million bpd. That lags the pre-pandemic high of 13.1 million bpd.

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.

Minutes from the March Federal Open Market Committee policy meeting revealed that Federal Reserve economists anticipate a recession later this year, stemming from the fallout of the Silicon Valley Bank and Signature Bank failures.

ING economists assert that there are plenty of demand concerns “and that is well reflected in weakening refinery margins, which have been largely driven by weakness in middle distillates.”

OPEC agrees, citing concerns surrounding global economic weakness and growing inventories in an April 13 report (pdf). The cartel noted that if the economy slows, then sluggish growth might weigh on typically high seasonal demand.

“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.

“We are predicting that we’re going to see a supply deficit later in the year. Already we are seeing global oil inventories start to draw down,” he wrote in a note.

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.

For the week that ended on April 7, the product supplied of finished motor gasoline totaled 8.936 million barrels, up roughly 18 percent from the year’s first week. But it’s down from the previous week’s year-to-date high of 9.295 million barrels.

Domestic supplies of gasoline have declined for eight consecutive weeks, falling by nearly 20 million barrels, EIA data show.

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.

“The oil market has had a few days to digest the OPEC news and speculate about the reason. This has led to the price of oil stabilizing for now, but the cost of oil accounts for more than 50 percent of what we pay at the pump, so drivers may not catch a break at the pump any time soon," AAA spokesman Andrew Gross said in a report.

But how much could gasoline prices rise in the coming months?

According to the Kiplinger Energy Outlook, the national average could climb to at least $3.75 this spring and “threaten $4 if oil prices keep rising.”

Households also expect gas prices to be higher over the next year. The Federal Reserve Bank of New York’s Survey of Consumer Expectations in March shows that one-year-ahead predictions for gas prices are 4.6 percent.

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?

Last month, the energy index fell by 6.4 percent year-over-year and 3.5 percent month-over-month. Gasoline prices also plunged 17.3 percent from the same time a year ago and tumbled 4.6 percent from February to March.