Will Rising Oil Prices Threaten Global Economic Stability in 2023? The Saudi-Russia Voluntary Production Cuts Factor

Impact of Rising Oil Prices on the Economy

As the prices of oil continue to escalate, traders are beginning to question the potential impact on the economy and the sustainability of these high prices. They are also pondering how to strategically position their portfolios for the rest of 2023 and beyond. For most of the year, WTI crude futures (CL1:COM) stayed below $80 per barrel. However, they exceeded this mark during the summer, reaching a peak of $88/bbl on Tuesday. This significant increase occurred after Russia and Saudi Arabia announced their decision to extend their voluntary production cuts until the end of the year. At the same time, Brent traded above $90.

Reaction to Extended Production Cuts and Inflation Risks

Most had anticipated that the OPEC+ leaders would continue their production cuts until October, but the declaration of a three-month extension was “a shock”. This unexpected decision resulted in abrupt losses in equities due to fears of increasing prices leading to further monetary tightening. Recent production cuts by Saudi Arabia (1M barrels per day) and Russia (300K bpd) have compounded the April cut agreed upon by several OPEC+ producers (1.66M bpd), which extends until the end of 2024. Both nations have also expressed their readiness to deepen these cuts, contingent upon market conditions.

The Response of the U.S. Government and Rising Gas Prices

In response to this announcement, U.S. National Security Advisor Jake Sullivan asserted that President Biden is using every tool at his disposal to reduce gas prices for consumers. According to AAA, the national average price of regular gasoline now stands at $3.811 a gallon, representing the highest seasonal level since 2012. The increase in energy costs could potentially undermine the expectations for a ‘soft landing’, which have been revived by recent economic data.

Global Economic Impact and Concerns

The rise in energy prices may obstruct global growth, particularly in China, where the economy is under strain due to a shaky pandemic recovery, property issues, and debt problems. Saudi Arabia and Russia face a difficult task in balancing these cuts without negatively impacting the Chinese economy. If China’s situation worsens with high oil prices, their recent production cuts may backfire, reducing the demand for oil. It’s worth noting that the G7, alongside the EU and Australia, appear to have postponed regular reviews of their $60 Russian oil price cap scheme, despite Urals-grade crude trading at an average of $74/bbl in August.