$100 a barrel oil raises global inflation fears

Aramco

• Brent up 30% since May
• Higher price expected to stay
• Inflationary spiral feared

Oil has risen to its highest level since November, reigniting fears over inflationary pressures on the global economy as it approaches $100 a barrel.

Brent crude hit $95 barrel this week, before reducing gains, as the extension of Opec+ supply cuts tightened the markets.

In a sign of a massive uptick in the energy markets, Brent prices have risen 30 percent over the last four months. The rally has been the catalyst for speculation that oil is now primed to hit the psychologically important $100 level.

• Opec pours cold water on IEA’s ‘peak’ for oil demand
• Global oil stockpiles to fall after Saudi cut says EIA
• Oil at $90-$100 may lead Saudi to taper supply cuts 

“With a target of $100 a barrel in sight, Brent prices are now 5 percent away from the crucial level,” Vijay Valecha, chief investment officer at Dubai-based financial service provider Century Financial, told AGBI.

Booming oil prices took centre stage at the World Petroleum Congress in Canada this week.

Saudi Arabia’s Energy Minister Prince Abdulaziz bin Salman defended the Opec+ cuts, saying international energy markets need light-handed regulation to limit volatility. He added that the Organisation was working to keep markets stable and improve energy security without targeting a specific price.

The ongoing momentum has sparked a new wave of buying in the options market, especially in next month’s contracts, Valecha said. 

This signifies the massive uptick in bullish momentum, although most of the buying has been in the hedged call spread strategy, (the use of two options in a way that limits risk) the expert said.

For Mazen Salhab, Dubai-based chief market strategist Mena at trading platform BDSwiss, the markets are bullish for the moment but the situation is not sustainable. 

“Technically speaking, the market is still in higher prices and heading higher to $95-$100 is a matter of time. There is a momentum right now. There is a pricing sentiment,” he told AGBI.

Other economists also confirmed that higher oil prices are going to stay for longer, as Saudi Arabia and Russia have constrained supply, while the demand remains resilient. 

“The latest reports from major oil agencies have highlighted that, for the last quarter of 2023, the overall market deficit is likely to exceed more than two million barrels per day,” said Valecha. 

The cuts will mean a substantial market deficit through the fourth quarter, according to the International Energy Agency (IEA).

Inflationary spiral

The extension of Opec+ cuts has created more concerns about a global inflationary spiral.

“This is very bad for equities,” Salhab said. 

“We are afraid that higher oil prices will lead to another vicious inflation cycle globally. If inflation increases again, this will weaken the global economy.”

Although the outlook of the world’s biggest economies- the US and China, is improving, it remains uncertain and any economic slowdown will weigh on crude demand. 

“Oil at $100 a barrel will not be sustainable,” Salhab said, adding that there are no real fundamental reasons to exceed that level.

He said that if such a price was not associated with better global growth, “then the fall of oil is likely to be accurate”.

“The global economy is not only relying on America,” he said, adding that it was relying now on growth from developing countries such as India and the growth in China.

“Higher oil prices are unlikely to help the biggest importing economies like India, China, and Japan,” he added, so there is an increased risk of volatility. 

“Traders and investors must be careful as the volatility is going to be aggressive.”