Putin-driven oil rise will slow inflation relief

Black gold is once again a protagonist on the international economic board and will be decisive from now on in the path of reducing inflation, both in Europe – including Spain, where yesterday a rebound in the interannual rate of inflation was confirmed up to 3.5% in September from 2.6% in August – as in the United States.

In the case of our country, experts such as those from BBVA Research had predicted a year-on-year inflation of 3.2% for September, but they estimate that the indicator has finally risen by 3.5% because there are three additional tenths that respond directly to the increase in prices. of the oil. In fact, they calculate that for every 10 dollars (9.45 euros) that the price of a barrel of Brent increases above its current level, inflation will rise by three tenths.

This Thursday, the price of Brent – North Sea crude – for delivery in November exceeded 97 dollars per barrel (91.9 euros), which in just one week has risen four dollars and could imminently beat its previous maximum, recorded in October 2022, when it exceeded 97.9 dollars (92.8 euros). In just two months the increase has been twenty dollars, since in July it was trading at 79.9 dollars (75.7 euros).

What is the reason for this sharp increase? Mainly due to the decision of Vladimir Putin, president of Russia, to cut crude oil production. To date, Russia (a member of OPEC+) produced and sold as much oil as it could, but this summer it changed its strategy and aligned itself with Saudi Arabia in its production cut, which has caused an increase in the price of this raw material. energy. This way, when you decide to sell the same amount as before, you will earn much more because the price will be much higher.

For most EU countries, dependent on foreign oil, this rise translates into direct impoverishment and an increase in inflation, since it implies an almost automatic increase in the price of fuel and, as these inputs are production of most productive sectors, companies increase their costs and pass the increase on to final prices.

Gasoline has risen 0.5% in the last week and is already sold at 1.76 euros per liter on average, according to the latest data from the European Union Petroleum Bulletin, although in some pumps the price exceeds that amount. Filling an average 55-liter tank with gasoline costs 97 euros, while a diesel tank will cost 93.

The problem worsens if the outlook for the coming months is taken into account, since experts see it as very possible that crude oil will exceed $100 per barrel (94.7 euros).. “The biggest question for the inflation outlook is the evolution of fuel prices. Oil prices have risen sharply since early summer. As the market will be in deficit for the rest of the year, we expect oil prices to be able to rise above $100 per barrel in the coming weeks as supply cuts by OPEC+ countries will more than offset lower demand due to the slowdown in the global economy,” the ING research service predicted this Thursday.

“The question remains how long oil prices will remain at these high levels. If, as we expect, this is a temporary rebound, the impact on our inflation outlook will be quite moderate. However, the danger is that if oil prices remain high for longer, companies will increasingly pass on these higher prices, which will cause them to once again affect underlying inflation,” they warn, alluding to possible effects. second round.

In principle, the weakening of demand and the fall in confidence that is already beginning to be seen in much of the European continent should help oil prices not remain so high for long, but there remains a risk that This does not happen and there are analysts who are less optimistic.

“Demand for oil products is expected to increase heading into the winter and, with supply remaining limited, we believe the price of crude oil could continue to rise unless measures to reduce production are eased or the demand is slowed down by factors such as a mild winter or the rise in rates,” they point out from Nomura; while at Goldman Sachs they believe “that OPEC will be able to keep the brent in the range of 80-105 dollars in 2024, given the robust growth in demand, especially in Asia,” they point out.

The role of central banks

For central banks, this means that the scenario becomes even more complicated, since in the search for a balance between reducing inflation but not putting the economy into a recession, the impact of very expensive oil is now added.. “Rising oil prices have become the new concern for central banks, compounding the current trilemma: how to balance slowing economies, still too high inflation and the delayed impact of unprecedented interest rate increases,” ING points out.

According to his forecasts, if oil stabilizes next year around 95 dollars per barrel (90 euros) instead of 82 dollars (77 euros), “this would probably raise the ECB's inflation forecasts to 3.3% for next year (from 3.2%) and, more importantly, up to 2.4% in 2025 (from 2.1%). As a result, the return to 2% would be delayed until 2026.”. This delay in reaching the objective, together with the fact that the rise in oil can affect inflation expectations and generate second round effects, “will undoubtedly increase the ECB's concerns, making not only an additional rate hike more likely, but also keep rates higher for longer,” they warn.