5 Minute Read by,,,,,,,,, (Reuters) – LONDON (Reuters) – Oil prices have risen to $80 a barrel, the highest level since 2018, threatening to destabilize central banks’ temporary inflation narratives as well as the post-pandemic economic recovery. PHOTO FROM THE FILE: On April 14, 2020, a 3D printed oil pump jack is shown in front of a stock graph and the OPEC emblem in this illustrative picture. REUTERS/Illustration/File/Dado Ruvic Photo Last year’s oil battle between Saudi Arabia and Russia demonstrated that disagreements among OPEC+ members do not always lead to higher prices, but this week’s deadlock within the group pushed prices higher, adding to year-to-date gains of roughly 50%. Many traders do not rule out a recovery to the 2014 heights of $100 per barrel. Brent futures fell approximately 3% on Tuesday, but if prices stay at current levels or rise more, inflation could be more persistent than expected. This will put pressure on central banks to reverse their ultra-easy monetary policies. Here are a few pressure points to consider: 1/ CHANGE SPEED The percentage shift in oil prices year over year is at levels not seen in more than 40 years. Brent crude futures prices are at under $75 per barrel, less than half of what they were in 2008. Markets, on the other hand, have a propensity of fleeing from sudden movements, according to Christian Keller of Barclays. “The rate of acceleration is much faster than even after the global financial crisis,” Keller said. “And, while many expect the effects to be transient, they are higher than we anticipated, even if only temporarily.” (Graph: Percentage rises in oil prices, ) 2/ DO YOU WANT TO STAY? Investors, central bankers, and policymakers have been debating whether the recent increase in inflation is merely a blip on the radar or a sign of things to come. Inflation readings have come in higher than expected, according to Citi’s inflation surprise index, which has reached new highs in the United States and multi-year highs in many other countries. Price pressures have been exacerbated by a combination of bottlenecks, ample global liquidity, and rising commodity prices, including food. The debate takes on a new dimension as oil prices rise. “Oil prices enter the picture because of the potential impact they could have in turning this transitory rising inflation into something more medium-term,” said UBS’s Massimiliano Castelli. He added that a rise in oil prices to $100 a barrel could “have a negative impact on inflation expectations.” (Graph: Citi Surprise Inflation Readings, ) 3/ FRONTLINE OF AN EMERGING MARKET Oil importers account for over 80% of developing market economies’ gross domestic product (GDP). Because food and energy make up a larger amount of their inflation baskets, many people are more susceptible to price increases. Several of them, including Russia and Brazil, have already had to raise interest rates. According to Schroders’ David Rees, raising oil prices to $100 per barrel may push energy inflation in emerging nations to 20%. “(Oil price increases) would be a drag for oil-importing nations’ recoveries,” Rees said, just as many emerging economies were digesting the Fed’s hawkish tilt. (Graph: Inflationary pressures in emerging markets, ) 4/ FALLOUT OF CURRENCY An protracted rise in oil prices would be detrimental to developing market currencies, which recently touched a new high. Importing countries’ currencies, such as India’s and Turkey’s, would be the hardest impacted, albeit Russia’s rouble, which exports oil, would gain. In developed markets, the Norwegian crown, which is already among the top three performing currencies this year, would profit alongside its Canadian equivalent, both of which are large oil exporters. The case for the US dollar is a little more complicated: High oil prices were historically dollar-negative because they expanded the US current account deficit, but that equation has reversed in recent years as the US has become a net oil exporter. Higher oil prices due to increased demand indicate a continuing global recovery, but a supply-driven squeeze has typically been linked to dollar depreciation. (Photo courtesy of dollar oil.) 5/ INFLATION VS. GROWTH Inflation in the United States is above 5%, whereas it is hanging around the European Central Bank’s target of close to but below 2% in the eurozone. Those aren’t necessarily red lights, but they come at a time when many people believe the world’s economic boom, particularly in the United States and China, has hit its peak. Even in Europe, where GDP is still accelerating, increased petroleum prices would have an impact, potentially reducing consumer spending, which is a fundamental component of the bloc’s recovery. “Higher oil prices are a tax in Europe, and they can squeeze out expenditure,” said Chris Scicluna, Daiwa Capital Markets’ head of economic research. On Tuesday, a market-based indicator of long-term inflation expectations in the euro area surged to over 1.65%, the highest level since 2018, indicating that investors are bracing for higher inflation. The indicator moves in lockstep with oil prices. The five-year, five-year breakeven inflation forwards in the United States are now at 2.34 percent, up from a low of roughly 2.22 percent last month. (Graph: Oil prices vs. Eurozone inflation in the future, ) In London, Karin Strohecker, Saikat Chatterjee, and Dhara Ranasinghe reported; Tom Arnold contributed additional reporting; and Sujata Rao and Matthew Lewis edited./n
Read More
