OPEC’s Oil Cuts Pose Challenge to Central Banks

(Analysis) After multiple delays, the European Central Bank (ECB) and the Federal Reserve seemed finally set to lower interest rates in June.

Yet, the Organization of the Petroleum Exporting Countries (OPEC) threatens to complicate their plans.

OPEC’s repeated artificial production cuts have pushed crude oil prices significantly higher than market fundamentals would suggest.

This situation is further exacerbated by drone attacks on Russian oil infrastructure by Ukraine, a country crucial to the global oil balance despite Western sanctions.

Oil prices complicate the inflation indices central banks use to guide their monetary policy decisions.

This is due to oil’s essential role in the global economy, impacting the entire price chain, and the West’s limited ability to influence oil production.

Most of the world’s oil exporters are in the Middle East and Latin America and are members of OPEC+, an expanded cartel version.

Brazil, with its swiftly increasing oil exports, stands out as a significant exception and merits close observation. Its staunch independence may become increasingly pivotal in the near future.

High oil prices affect all consumer countries, including the US and China, but hit the eurozone particularly hard due to its sensitivity to global oil market fluctuations.

Despite recent corrections, partly due to Washington’s request for Kyiv to stop targeting Russian oil facilities to prevent further price spikes, Brent oil prices have risen nearly 20% in just over three months.

This reversal of a previous downward trend in energy prices has heightened concerns at both the ECB and the Fed, especially as they approach the final stages of their fight against inflation.

An increase in oil prices can lead to higher consumer goods prices across the board, most affecting motorists and public transport users.

But the ripple effects reach far beyond, impacting the final prices of nearly all products, especially food, just as consumers began to see relief.

In the US, price decreases have stalled recently, reigniting debates between moderate and radical hawks over persistent inflation and parallels to the 1970s’ inflation surge.

Brent will remain high

Experts believe the impact on inflation will be limited. They predict Brent will remain “high” in the second half of 2024 but not sustainably exceeding $90 per barrel.

Despite recent increases, he argues that oil prices are not “particularly high,” especially in a historical context, and unlikely to force a change in central banks’ rate decisions.

Thus, a rate decrease in June remains feasible, offering relief to mortgage holders.

According to experts, oil would need to exceed $100 per barrel to significantly affect inflation and interest rate decisions, a scenario few anticipate for now.