Oil prices are on track to reach $100 a barrel this month for the first time in 2023 after surging by almost 30% since June, after Russian and Saudi Arabian production cuts and rising demand from China.
Brent crude, the oil price benchmark, rose to a 10-month high last week of almost $94 a barrel, up from $72 a barrel at its lowest point in June – heading for its biggest quarterly increase since Russia’s invasion of Ukraine.
The lighter US crude, West Texas Intermediate, has climbed from $67 a barrel to $90 a barrel over the same period. Both benchmarks were up by about 4% on the week.
Petrol and diesel prices in the UK have begun to rise modestly, adding 10p to the cost of a litre since June. The motoring organisation RAC said the average price of unleaded fuel was £1.52 a litre on Friday, up from £1.43 in June.
In the US, where tax makes up a smaller proportion of the price at the pumps, gasoline has jumped by more than 10% to $3.90 (£3.15) a gallon (3.8 litres).
An increase in demand for flights in the US, Europe, and more recently China have spurred an even larger increase in jet fuel prices tracked by the Energy Information Administration (EIA). Prices averaged $3.07 a gallon at the end of August, up by 50% from a recent low of $2.05 in early May.
Earlier this month, Saudi Arabia extended 1.3m barrels per day (bpd) of combined cuts to the end of the year, accelerating a drawdown in global inventories.
Supply cuts by Russia to boost prices have also supported efforts by other Opec countries to push prices towards $100 a barrel.
The International Energy Agency (IEA) warned last week that the ongoing supply cuts made by these two Opec+ leaders would create a “significant supply shortfall”, which poses a considerable threat to ongoing price volatility.
The report was released just a day after Opec announced that the market was facing a deficit of more than 3m bpd in the upcoming quarter, potentially resulting in the most substantial supply shortage in more than a decade.
Saudia Arabia and its partners in Opec are also concerned that the IEA has predicted that demand for oil will peak before 2030, which some analysts believe could be brought forward to 2026 by the rapid switch to renewables already under way.
Stephen Innes, managing partner at SPI asset management, said: “Oil’s wicked ripper is showing few signs of abating just yet.”
The rising cost of fuel and demand from the Chinese economy, which ranks as the world’s biggest oil importer, are expected to cloud the outlook for central banks and their mission to bring down inflation rates that are still well above the 2% target level.
The drop in oil prices played a large role in the fall of inflation in the first half of this year, but a rise is now expected to act as a brake in the second half and into 2024.
The European Central Bank implemented a 10th consecutive increase in interest rates last week and implied it was likely to stop there. On Friday, however, policymakers said a further hike was not off the table.
US central bank interest rates were widely expected to have hit a peak after a drop last month in core inflation, which strips out volatile elements such as fuel and food. Yet the Federal Reserve has signalled that the door remains open for a possible final increase in November.
“Betting on oil is becoming a favourite trade on Wall Street. No one is doubting the Opec+ (oil output) decision at the end of last month will keep the oil market very tight in the fourth quarter,” said Edward Moya, an OANDA analyst.
