Triple-digit oil prices would almost certainly force inflation higher, making it more likely that the Federal Reserve will keep raising interest rates into 2024. But some analysts say oil’s inflationary pressure will wane by late this year as supply catches up with demand.
Elevated oil prices have forced U.S. inflation upward, largely because gasoline prices have been rising. In August, gasoline contributed more than half of the 0.6% monthly increase in consumer prices. The average gasoline price is now $3.87 per gallon, about 20 cents higher than this time last year, according to AAA. Diesel prices are also rising, and those prices can filter into other goods because diesel affects shipping costs.
Still, the latest oil boom looks closer to its end than its beginning, according to Natasha Kaneva, head of the global commodities strategy team at J.P. Morgan.
“After reaching our target of $90 in September, further price gains may be limited as we believe most bullish cues—both macro and micro—for the market have been exhausted for now,” she wrote in a note published on Wednesday. She expects oil prices to end the year at $86 a barrel.
Oil prices have been boosted by strong travel demand this summer and China’s reopening from Covid-19 restrictions. But more recent data indicate that those two tailwinds are slowing—or even reversing.
“Demand risks are shifting to the downside,” Kaneva wrote.
High gasoline prices appear to have convinced some consumers to drive less.
“In the U.S., the strong start to the summer faded somewhat in July and August and demand has remained lackluster so far in September,” she wrote. Last week, AAA predicted that gas prices may “slowly dip” over the coming weeks as demand drops.
And China’s demand growth also looks like it has decelerated.
“While we see Chinese demand rising by 1 million barrels per day in the final quarter of the year compared to year-ago levels, demand will likely remain flat with third quarter 2023 volumes,” Kaneva wrote.
Citi analyst Alastair Syme says oil prices look unlikely to cause major global inflation next year.
“All the data we see points to a degree of oil market oversupply in 2024, and with continued OPEC+ cuts needed to accommodate growing non-OPEC supply against anemic demand,” he wrote Wednesday.
That said, Syme is concerned about natural gas prices affecting global inflation next year. Natural gas is used for heating, industrial activity, and to produce electricity, so it can have a major ripple effect across economies.
“Here the challenge remains that we have lost around 4% of global gas supply from the cessation of Russian sales to Europe,” he wrote.
Write to Avi Salzman at firstname.lastname@example.org