Higher oil prices fall short of energy shock - 11 September 2023
Following greater and more widespread disinflation than expected in the first half, the recent rise in oil prices has sparked concern among investors. However, the resultant energy shock is very modest compared to that seen in 2022.
In the wake of Saudi Arabia and Russia’s announcements on 5 September that they were extending their oil production cuts by three months, until December 2023, the price of Brent oil shot up to over $90 a barrel (cf. chart 1). This development poses two main risks for the global economy. First, it could cast doubt on the scenario of regained purchasing power and lower costs for companies. Second, it could reawaken central banks’ heightened fears of inflation.
The OPEC will have to reach a consensus in December 2023 on whether or not to continue the supply cuts announced in April. There is much uncertainty in this regard; the OPEC is aware that if prices rise again, then the US supply of shale oil will bounce back significantly. Furthermore, in deciding how to proceed, the OPEC must also try to avoid destroying demand at a rather difficult time for part of the global economy (namely China and Europe). However, the recent actions of Saudi Arabia and Russia have increased the risk of a continued rise in oil prices.
That said, the rise in energy prices has largely been limited to oil – a very different state of affairs to that seen last year with the boycotts and subsequent cut-off of Russian gas deliveries. Natural gas prices have certainly been affected by recent strikes, but they have remained reasonable, as have coal prices (cf. chart 2). In Europe, natural gas stocks reached 90% capacity, significantly reducing the risk of upward pressure on prices this winter. In Germany, wholesale electricity prices have remained stable since spring.
Ever-sensitive to minor developments, the financial markets naturally reacted poorly to the rise of oil prices. However, we consider this to be more of a relative price trend than a true inflationary impulse. Excluding oil, disinflation is expected to continue in Europe, particularly in the food and industrial sectors. It will nevertheless be difficult to reassure investors until oil prices stabilise.