Dr. Ken Rietz
September 7, 2023
Last Friday, the price of crude oil jumped to a multi-month high. Futures markets were closed early on Monday for a US holiday, but oil resumed its climb Tuesday and Wednesday, breaking above $90 per barrel, a price not seen since November 2022. As always, multiple factors played into this unusually rapid rise in the price of oil. We begin with a chart of the crude oil prices, using the Brent Crude price because it is the international basis for the price of oil.
Figure 1: Front month futures price of Brent Crude Oil, dollars per barrel, ICE London Exchange
We begin with a bit of the history of crude oil prices. Back in December of 2022, the G-7 and EU established a price cap for the main crude oil export of Russia at $60/barrel, as a way of capping the revenue that Russia could use against Ukraine. That cap was reached in July 2023, effectively cutting off EU or G-7 imports and even support (such as shipping or insurance) to countries outside of the EU or G-7 unless the price was below the cap. Notice that this restriction would not apply to pipeline delivery, and the US was delicate with the enforcement of maritime shipping to avoid causing the price of crude to rise too much.
The price of oil continued to increase in July and August due to increased demand: power generation, air travel, and the expectation of increasing Chinese petrochemical activity. Supply diminished because of OPEC+ output reduction (mainly Saudi Arabia) and the cap on Russian exports. Although non-OPEC+ output increased, it was not able to keep up with the reduction. The net effects were, of course, the increase in the price of crude oil and a reduction in oil in storage.
A general improvement in economic sentiment followed a feeling that a “soft landing” was becoming more likely with a reduction in inflation, with oil demand hitting an all-time high of 103 mb/d with OECD estimated demand rising. The OPEC+ excess capacity of more than 5 mb/d allows some cushion, but still expect oil prices to continue their overall upward trend.