According to analysts, a variety of information, such as U.S. inflation data and OPEC’s monthly market report, could impact the price of oil. However, supply-side shortages and economic troubles will ultimately have the most influence on the market this week.
Oil prices are currently at levels not seen since November, with West Texas Intermediate (the U.S. benchmark for oil prices) remaining above $85 per barrel. While a strong U.S. jobs report last week sparked rumors of potential action by the Federal Reserve, Saudi Arabia’s decision to extend production cuts through the end of the year overshadowed most economic indicators last week.
Saudi Arabia stated that its voluntary reduction in production is meant to support the stability and balance of oil markets. This decision plays a significant role in the policies of OPEC+, a group comprised of core members of the Organization of the Petroleum Exporting Countries and non-member state allies like Russia.
The Kingdom’s decision comes as the International Monetary Fund highlights the need for sustained higher oil prices due to expectations that its budget as a percentage of gross domestic product will decline by 1.2% this year. Paul Hickin, the chief editor at London-based Petroleum Economist, commented that the positive impact of the decision may be limited due to concerns about Chinese demand.
Recent data revealed that Chinese factory exports in August declined by 8.8% compared to the previous year, while imports dropped by 7.3%, indicating weakness both domestically and internationally. Hickin added, “We are also approaching price levels where demand destruction occurs, and we are not out of the inflationary woods yet. So, despite the output cuts, it is not all positive.”
Given that energy comprises a significant portion of headline inflation in leading global economies, excessively high oil prices could compel central banks to continue their aggressive rate policies, further hindering global demand.
This issue will come into focus on Thursday when the European Central Bank announces its decision on interest rates, coinciding with Saudi Arabia’s release of its own year-on-year inflation data. Despite some challenges, the oil market remains tight. The U.S. Energy Information Administration reports that crude oil inventories are 4% below the five-year average for this time of year. Additionally, the energy-rich Gulf Coast is facing ongoing hurricane threats, while the Strategic Petroleum Reserve is depleted.
