Crude Prices Set to Rise; Saudi-Russian Output Strategy to Keep Hurting the US

Crude oil prices rose 2 percent on Wednesday after data showed the rise in US inflation slowed down in March. The softening of inflation outlook raised hopes that the US Federal Reserve will end the rate hike regime this year, paving the way for an economic expansion that will increase the demand for energy.

While Brent crude rose $1.72 to hit $87.33 a barrel, the West Texas Intermediate closed up $1.73 to touch to $83.26, its highest in five months.

Crude oil prices
Crude oil prices Flickr

Softening Inflation

Earlier, data showed US consumer price inflation rose only 0.1 percent on-month in March, lower than the 0.4 percent increase in February. The on-year inflation stood at 5.0 percent last month, compared with 6.0 percent in February. This fueled hopes that the US Fed could hike the rate only once more and eventually start paring the rates by the end of the year. According to a Reuters report, the markets expect that the Federal Reserve will likely cut the rates to around 4.35 percent by the end of 2023.

Some analysts think that this scenario could lead to a further steep rise in crude prices. A report by DailyFX says that crude prices could touch $90 this year. "It is now testing the 82.50-84.00 area, including the 200-day moving average and the January high. Oil's rise above the March high of 81.00 on the monthly charts and the 89-day moving average has raised the odds of a move above 82.50-84.00. Such a break would imply that the ten-month-long downward pressure had faded, exposing the upside toward the November high of 93.75," the report says.

crude oil storage tanks
crude oil storage tanks reuters

Other Factors

There are other factors at play as well, that drive crude prices. The most significant is the Opec+ bloc's willingness to push harder with output cuts, despite the western pressure not to do so. A Bloomberg analysis clearly shows how this strategy by the Saudi Arabia-led bloc is hurting the US.

Saudi Arabia, a close ally of the United States, has in the recent past, started pivoting away from the close embrace of Washington. When it comes to energy policy, Riyadh is more aligned with Moscow, much to the disappointment of Washington.

Will oil price stay higher after Opec-Russia output reduction?
Opec flag outside cartel's headquarters Reuters

Saudi Arabia led the Opec group in lowering the combined oil production by 2 million barrels a day in October 2022, despite President Joe Biden's express demand to raise oil output. The Opec+ move clearly helped Russia earn more money from oil sales at a time when it was faced with crippling Western sanctions over the Ukraine war.

Cartel Moves

The Opec+ cartel once again cut oil output this month. The bloc said further oil output cuts of around 1.16 million barrels per day, a move that caused deep disappointment among the US policymakers.

"The Saudi-Russia oil alliance has the potential to cause all kinds of trouble for the US economy — and even for President Joe Biden's re-election campaign," says the Bloomberg report.

The report observes that the output cut announced in April resulted in about a $5 increase in the crude prices. While the US consumers will have to spend more on energy they will have to cut down on other expenses, resulting in the recessionary pressure. At the other end of the spectrum, Russian President Vladimir Putin's Ukraine war chest will swell as his country is among the top exporters of crude.