Crude oil prices at 3-year high inflames inflation fears

Crude oil prices rallied further at the beginning of the week on signals from developed markets that the crude market is tightening because of a global energy crunch. West Texas Intermediate (WTI) Crude topped $75 a barrel after a continuous upward run of five weeks, while Brent crude hit its highest mark since October 2018. In the last one week alone, Brent crude oil prices have surged over 6 per cent to around $79 per barrel mark.

Oil prices have in fact risen over 80% over the past one year as demand for oil worldwide has recovered from the disruption caused by the pandemic.

What has led to the sharp surge?

Disruptions in US Gulf Coast production following Hurricane Ida have led to sharp draws in the US and global inventories. US stock piles or oil inventories have been hovering near three-year lows and now countries want to hold more inventory in anticipation of surge in demand during the festive season.

In India, meantime, India’s crude imports rose to their highest in three months in August, rebounding from July’s near one-year low.

Oil supply outlook

When we see the supply side, OPEC – Organization of Petroleum Exporting Countries and allies have been reducing the output curbs gradually. The next meeting of OPEC+ is scheduled on October 4 when these member nations will review output policy. Some of the oil analysts and experts have pointed out that oil demand is looking as though it will be stronger than expected in the near term. Some have flagged further gains in prices as well.

Can the spike in oil prices inflame inflation fears?

India’s crude oil imports rose to a three-month peak in August, rebounding from a near one-year low hit in July. Crude oil imports in August rose 15.8% versus July and were also 3.1% higher than a year-ago at 17.39 million tonnes, as per the data on the website of the Petroleum Planning and Analysis Cell (PPAC).

The rising prices of crude oil may directly impact the domestic fuel prices of petrol and diesel.  Experts believe retail prices of petrol and diesel are under pressure due to rising international oil rates and automobile fuel rates may see a further northward movement.

“The demand for crude oil is expected to rise above pre-Covid levels as supply is still lower due to cyclone period in US. We are expecting that price are expected to trade higher and Brent may test $80 to $83 levels. Higher demand forecast from OPEC+ members is also supportive for Crude prices”, said Anuj Gupta, Vice President at IIFL Securities.

He also said that the this may translate into higher domestic fuel prices even as demand for the automobile fuel is expected to rise further and may even hit record highs as easing Covid-19 curbs is leading to revenge spending on  business and leisure travel.

Experts see the rise in fuel prices leading to higher inflation of essential agri-commodities as well.