In the intricate web of global economics, few elements have as profound an impact as the price of oil and inflation rates. These two factors are not only interconnected but also indicative of the overall health and trajectory of economies around the world. In an exclusive conversation with RoboForex analyst, we delve into the intricate dynamics that are currently shaping the oil market and U.S. inflation trends, offering insights into what lies ahead.

FXMAG.COM: How long can the oil price rise?

Since 28 June, Brent has increased in price by 18% and is approaching resistance at 87 USD. A breakout beyond this level could result in further price growth, with the potential to reach 100 USD. However, the PMI, which tracks business activity in the manufacturing sectors of the US and Europe, fell below 50 again in July. This decline signals a slowdown in economic activity and, as a result, a decrease in demand for oil.

To stabilise oil prices, OPEC+ members, particularly Saudi Arabia, reduced production by 1 million barrels per day in July and continued into August. Russia also joined in August, announcing a cut in oil exports by 500 thousand barrels per day. The decline in business activity in the US and EU along with reduced oil production could potentially stabilise the price in the range of 83-87 USD per barrel, but this balance could be disrupted by China and the US.

In China, regulators are urging local authorities to accelerate bond sales to finance infrastructure projects and support the economy. The funds allocated for this purpose must be spent by November 2023. China is putting words into action, and this move could increase the demand for oil.

Meanwhile, strategic oil reserves in the US have been depleted to the lowest level since 1983, reaching 354 million barrels, as they were sold to control fuel prices. The potential re-entry of the US into the oil market to replenish reserves could further push oil prices upward. On 1 August, it was reported that the US administration cancelled an order to purchase 6 million barrels of oil for reserve replenishment due to high prices. This indicates that the authorities are following a strategic approach to buying oil and potentially increasing demand – by monitoring the situation and waiting for the right moment to buy.

In addition, the impact of the ongoing trend towards green energy is adding fuel to the fire, resulting in a lack of investments in the US oil industry. This is evident from the reduced number of active drilling rigs, which, according to Baker Hughes, decreased from 618 to 522 since the beginning of the year.

Production cuts, China's economic stimulus, replenishment of strategic reserves in the US, and underinvestment in the oil sector – all these factors act as catalysts for potential further growth in crude oil prices. Consequently, we can assume that the price of oil in Q3 may continue to rise. The only event that could change this scenario is a global economic recession.

FXMAG.COM: Will inflation continue to fall in the U.S. in the third quarter?

Since August 2022, the annual inflation rate in the US has been steadily decreasing, and according to July data, it has reached 3%. The Fed aims to achieve an inflation rate of 2%. To combat inflation, the Fed is raising interest rates and reducing its balance sheet to cool down the economy. Additionally, to curb fuel prices, the US government has turned to selling off strategic oil reserves, which also impacts the inflation level, leading to US oil reserves falling to levels not seen in 40 years.

As a result, fuel prices in the US have been on a decline since August 2022, and during the same period, the inflation rate has also been decreasing. However, this trend reversed in June 2023. Along with the increase in the price of crude oil, petrol, and diesel prices in the US surged, surpassing the values seen in April. This could have a negative effect on the inflation rate.

To control fuel prices, the US government can no longer rely on strategic reserves; instead, it is now attempting to replenish them, which could lead to a further increase in oil prices, and, consequently, fuel prices in the US.

Another factor that may impact inflation is the unexpectedly high number of new jobs, reaching 324 thousand in July, compared to the forecasted 189 thousand. The data on the number of jobs in the US has significantly exceeded forecasts for the fourth consecutive month. As more people work and earn an income, the demand for goods and services increases, which is another factor supporting inflation growth.

As a result, the decline in the inflation rate may halt in Q3, and if oil prices and job numbers continue their upward trend, we may even see a slight increase in inflation in September or October.

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