The world’s largest oil cartel sent shock waves through markets on Monday after a surprise weekend decision to cut production—fueling a morning spike in oil prices and pushing some experts to warn the development could further exacerbate inflationary pressures, driving up the cost of transportation and making the Federal Reserve’s job of taming inflation more difficult.
Oil prices surged as much as 8% Monday morning after OPEC+, a group of more than 20 oil-producing nations including Saudi Arabia and Russia, announced production cuts totaling more than 1 million barrels per day as a “precautionary measure aimed at supporting the stability of the oil market.”
“It’s a shock move… as the cartel had previously vowed to maintain a steady supply,” explains Nigel Green, the CEO of wealth advisory deVere Group, projecting the cuts could push prices—now at roughly $80 per barrel—close to $100 due to demand from a reopening China and ongoing sanctions against Russia.
The “dramatic cut” will only add to global inflationary pressures, driving up the prices of production and transportation, and potentially further disrupting supply chains, Green adds, noting “there’s real concern” the surprise decision could prompt central banks to maintain interest rates “higher for longer… which will hinder economic growth.”
The International Energy Agency also issued a warning after the decision, lamenting the oil market was already set to tighten in the second half of the year and stating the new cuts “risk exacerbating those strains and pushing up oil prices at a time when inflationary pressures are hurting vulnerable consumers around the world.”
In an interview with Bloomberg TV, Federal Reserve Bank of St. Louis President James Bullard said whether the announcement will have a lasting impact “is an open question,” but he acknowledged some of the impact could “feed into inflation and make our job [of taming inflation]
a little bit more difficult.”
The surprise announcement also suggests OPEC+ may be “getting more cautious” about its outlook for global oil demand “given the elevated threat of a potentially deep recession looming,” says Tom Essaye, founder of Sevens Report Research.
Oil prices plunged to a 15-month low last month as uncertainty over bank failures fueled broader market mayhem, but the latest surge has pushed them back to four-week highs. Experts are worried that uptick could stall—or reverse—some of the Fed’s progress in taming inflation, which in February fell to a 17-month low, as measured by the consumer price index on an annual basis. Energy prices have fallen in all but one of the last seven months.
The surge in oil prices comes after the average price for a gallon of gas hit a two-month high last week, as fuel demand continues to climb heading into the summer travel season. The national average for a gallon of gas shot up toward $3.50 on Saturday, up from about $3.42 the week prior.
Gas Prices Hit Two-Month High (Forbes)