Oil Prices Surge Past $90 Amid Production Cuts, Stoking Inflation Fears

Escalating Oil Prices

Oil prices have reached the significant milestone of $90 per barrel for the first time since November 2022, sending shock waves through many sectors of the economy. The climbing trend is attributable to various factors, the most prominent of which are the recent production cuts by oil giants, Saudi Arabia and Russia. Nonetheless, the rate of oil price increase is quickly becoming a central point of discourse. Throughout the majority of the year, WTI crude (CL1:COM) remained below $80 per barrel. It wasn’t until the summer when the prices finally broke above that mark and have since catapulted by over 17% in the past three weeks. “This spike is responsible for increasing expenses in sectors ranging from transportation to manufacturing.”

Economic Ramifications

The surge in energy prices has proven to be a significant challenge for the Federal Reserve, which was recently reveling in a few victories against inflation. Notably, U.S. consumer prices in August experienced their greatest rise in over a year, driven largely by an almost 11% hike in retail gasoline prices. While a weakening Chinese economy was expected to curtail global oil demand, supply shortages seem to be the bigger hurdle. This notion is strongly supported by oil and gas companies, who frequently cite regulatory constraints on their industry.

Implications of Strategic Petroleum Reserve Releases

Throughout 2022, releases from the Strategic Petroleum Reserve (SPR) were routine, especially following Russia’s invasion of Ukraine. However, these drawdowns have depleted the SPR to its lowest supply level in four decades. If WTI crude prices exceed $100 per barrel, it’s likely that the Biden administration would contemplate additional releases. In the meantime, other potential solutions are being considered, including routine consultations with domestic oil producers and refiners. International solutions, like easing export restrictions on oil-rich nations like Iran and Venezuela, are also under deliberation.

Commentary on U.S. Shale

Leo Nelissen, an author at Investing Group, asserts, “U.S. shale is running out of steam.” Nelissen points out that the issue is not peak oil but a considerable reduction in supply growth. Producers are witnessing a sharp decline in Tier 1 drilling reserves. As a result, they are prioritizing free cash flow generation over production growth, rewarding investors via dividends and buybacks. Nelissen argues that this change of approach reflects the lessons they’ve learned, especially amidst rising climate change movements aiming to eliminate big oil.