Oil prices extended 10-month highs on Wednesday. Meanwhile, annual inflation rose higher than expected to 3.7% in August.
Oil prices soared to the highest since November 2022 on Wednesday as expectations of tight crude supply gained traction. The surge in crude futures contracts came amid the latest consumer price index (CPI) data, which showed that the annual inflation rate rose to 3.7% in August versus the expected 3.6%.
International Energy Agency Cuts Q4 Oil Crude Demand Guidance
On Wednesday, oil prices reached a new 10-month high amid concerns that weak crude supply will persist throughout the year. According to the International Energy Agency (IEA), Russia’s and Saudi Arabia’s extension of 1.3 million barrels per day (BPD) of crude oil production reductions by the end of 2023 is set to result in a significant market deficit in the fourth quarter.
When writing, benchmark Brent futures rose 0.5% to $92.51 a barrel, marking the highest level since November 2022. Meanwhile, US West Texas Intermediate (WTI) crude rose 0.52% to $89.3.
On Tuesday, front-month Brent futures surged to $4.68 a barrel above the price of contracts for delivery in six months, a gap not seen in 10 months, suggesting considerably tighter market supply. Furthermore, the ongoing supply cuts could elevate Brent futures as high as over $100 a barrel before the end of the year, Bank of America (NYSE:BAC) analysts noted on Wednesday.
In the meantime, the IEA’s Q4 demand growth outlook was slashed by 600,000 BPD, seen by analysts as a significant tweak.
“The deficit is now broadly equal to the Saudi additional voluntary cut,” said Investec analyst Callum Macpherson.
On the other hand, the Organization of the Petroleum Exporting Countries (OPEC) reiterated its outlook for global solid oil demand growth in 2023 and 2024.
Inflation Rose to 3.7% in August, Exceeds Expectations
The latest upswing in crude oil prices comes as investors anxiously awaited the most recent US consumer price index (CPI) report. Released at 14:30 GMT, the data showed that the annual inflation rate rose by 3.7% in August, above the consensus estimates of 3.6%, and up from 3.2% in July.
Month-over-month, the yearly CPI increase was in line with economists’ expectations at 0.6%. Similarly, annual core inflation matched the projections with a 4.3% surge. However, core CPI advanced by 0.3% on a monthly basis, compared to the estimated 0.2% increase.
Although inflation has diminished notably since peaking at 9.1% last year, the latest data underscores the resilience in consumer prices, even after the Fed imposed 11 rate hikes since March 2022.
Now, the central bank sits in a challenging position as CPI remains far from its desired 2% target, meaning additional rate increases may be on the cards in 2023, although it is very unlikely that will happen before November.