The price of U.S. benchmark crude oil has reached its highest point this year, surpassing $90 a barrel. With diesel costs also rising, consumers are starting to pay attention to the impact of these developments.
On Friday, the October contract for West Texas Intermediate crude settled at $90.77 a barrel, the highest price for the front-month since November last year.
The climb in oil prices is primarily driven by expectations of tight supply, particularly due to potential supply shortfalls in the fourth quarter as reported by the Organization of the Petroleum Exporting Countries (OPEC) and the International Energy Agency. OPEC and Russia have extended their voluntary production cut, leading to forecasts of a fourth-quarter deficit in global oil supplies.
Investors often focus on key numbers such as $90 or $100 per barrel, becoming concerned about the impact on gas prices, consumer choices, and cost passing by companies. The effects of high oil prices are expected to ripple through various sectors of the economy, but likely not as extreme as during the Russia-Ukraine war in 2022.
The rise in oil prices may pose a challenge to the view that inflation will return to target levels. The Federal Reserve targets a 2% inflation rate, but the yearly rate of inflation rose to 3.7% in August.
Fuel costs
Higher energy costs are already impacting consumers, although the psychological effect of near $100 per barrel crude oil prices has a more significant influence. Gasoline prices have reached an average of $3.835 per gallon, up from $3.808 a week ago and 15.4 cents higher than a year ago.
High gasoline prices have a negative impact on consumer sentiment. However, gasoline prices may ease in the last 100 days of the year due to the ability of refiners and blenders to mix cheaper high-octane components into motor fuel.
Diesel prices have reached their highest levels since February, with rising prices leading to increased costs for manufactured goods and food prices.
Jet fuel prices have also risen, contributing to higher airfares in the third quarter.
Potential for higher oil prices
Saudi Arabia’s withholding of more than 180 million barrels of oil from the global market since July could lead to even higher oil prices. While using strategic petroleum reserves helps during emergencies, it is not a sustainable solution to ensure a well-supplied market.
There are three potential factors that could further push oil prices upwards: increased demand from China, a stronger U.S. dollar, and weather-related demand in the fourth quarter.
If the Chinese economy rebounds, it could drive up oil prices and further impact inflation numbers. A stronger U.S. dollar would make oil even more expensive for global buyers. Additionally, weather-related demand typically increases during the fourth quarter, which could contribute to price hikes, particularly if there is a supply shortfall.
