Power Up: OPEC+ might have just scuttled your road trip plans
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In a move that surprised absolutely nobody, Saudi Arabai and Russia have chosen to extend their voluntary oil output cuts to the end of this year, meaning that the OPEC+ group of oil producing countries will hold their production at 9 million barrels of oil per day.
The news was greeted by the usual kind of panic that follows such news, sending the benchmark Brent crude price up past the US$90 per barrel mark for the first time since November last year.
Power Up had been reasonably certain that the cuts would be maintained as keeping oil price above US$80/bbl has likely been the goal of the oil cartel all along.
At least some commentators – such as deVere Group founder Nigel Green – have warned that the decision to maintain output cuts will lead to higher petrol prices and an uptick in global inflation.
“OPEC+ is ramping up petrol price pain, triggering fresh and increasing concerns about rising global inflation – which was just beginning to ease – meaning central banks could possibly push higher-for-longer interest rates,” Green explained.
“Restricted oil supply leads to higher oil prices, which, in turn, can contribute to higher fuel prices for consumers and businesses, putting upward pressure on overall inflation.
“Higher energy costs also lead to increased production costs for companies, which are typically passed on to consumers in the form of higher prices for goods and services, again contributing to inflationary pressures.”
Will prices stay at this level? It is hard to say.
The last OPEC announcements about the actual cuts or that the cuts were being maintained led to prices rising rapidly before moderating to some extent.
It is very likely that this will be the case here as well though of course moderating from US$90/bbl will still likely lead to crude oil prices that will be higher than the levels we seen in the past month or so (or even all the way back to November last year really).
If this pattern holds true, expect to see higher prices at the pump (as flagged by Green) above, which is unlikely to be welcome news for those hoping to go for long road trips as we Australians are wont to do whenever the weather starts getting warmer.
Oil-induced inflationary pressure?
Will this result in greater inflation and possibly force economies into recessionary territory?
The world is arguably already leaning in that direction and the latest move by OPEC+ undoubtedly shoves it a couple more degrees towards falling over.
What is good is that the cartel has resisted any temptation to cut output even further in an attempt to drive crude prices up beyond the US$100/bbl mark as some sources believe.
Doing so would have likely sent the world into a tail spin, impacting on oil demand, which would in turn lead to a drop in prices that will prompt yet another output cut.
This could in turn lead to oil entering a vicious cycle that would do it no favours at all.
Opting to keep the existing cuts is a sign that OPEC+ is going for a balancing act, to maintain the status quo and perhaps eeking out a further couple of dollars on each barrel.
While it is not the route that consumers wished that the cartel would take (Increase production! Lower prices!), it is certainly not the worst either.
Just be prepared to save those pennies for the pumps instead.