Is oil about to reignite another fire under inflation?
It’s a question on many minds after two of the biggest suppliers of the world’s most important commodity raised the temperature last week.
Saudi Arabia shocked markets on Sept. 5 by announcing that a voluntary cut of 1 million barrels a day initially pledged for just July would be extended until the end of the year. Its OPEC+ ally Russia followed suit, extending its cut of 300,000 bpd.
Brent crude shot up above US$90 a barrel for the first time since November 2022 on the news. This morning the benchmark was trading at US$90.50 and U.S. West Texas Intermediate crude at US$87.08.
The squeeze will draw down oil inventories just as consumption is growing. Rystad Energy predicts that global demand will exceed supply by about 2.7 million bpd in the final quarter of this year.
It also threatens an inflationary spike that could disrupt the plans of central banks, such as the Bank of Canada, to wind down their cycle of interest-rate hikes.
“Suffice it to say, rising oil prices are perhaps the last thing the global economy needs at this point, when inflation expectations were on the cusp of finally receding,” said BMO Capital Markets chief economist Douglas Porter in a note Friday.
The reality that inflation had not yet been tamed weighed on financial markets, he said, pushing bond yields higher, especially in Canada where a hawkish hold by the Bank of Canada last week was followed by a stronger-than-expected August jobs report.
“While the chances of another rate hike by the BoC are still seen as a bit less than 50-50, no one is fully closing the door on the possibility,” said Porter.
“It will be a nervous couple of months, as Canada’s headline inflation rate is also about to take a serious trip north on higher energy prices.”
Gasoline alone, now up 8 per cent year over year, will be enough to take headline inflation to about 4 per cent in the next few months, he said.