Oil prices are showing signs of life

Diesel Prices

Although much of the world is still in an effective depression due to the reaction to COVID-19, there are augurs of a very different economy on the horizon. In particular, the oil price is beginning to spring back to life.

Overnight from Monday, January 11, Brent-blend hit $56.24 a barrel, an increase of 1% in 24 hours, with West Texas Intermediate showing a similar rise. There are two drivers of this. On the demand-side markets are getting optimistic about the resolution of the crisis through the use of vaccines. On the supply-side, Saudi Arabia has aggressively resumed its role as a ‘swing producer’ by restricting output. Last week the Kingdom announced that it would cut its own production by 1m barrels a day. This decision seems to have been part of a wider agreement within OPEC to keep production levels stable out of fear that, despite continuing upward drift in prices towards the end of the year, the market condition was “fragile”, to quote Saudi Energy Minister Prince Abdulaziz bin Salman.

The implication of the oil price rises in the face of Saudi caution may be that there will be continued price inflation in both the short and medium-term. The effects on the logistics sector would appear fairly obvious, however, the sector is already seeing significant inflation in certain segments, notably container shipping. If inputs such as bunker fuel begin to see violent increases the impact on freight-rates could be painful or even disruptive.

Over the past year, a series of constraints in logistics capacity have emerged in many types of market, such as the maldistribution of containers or the shortages of last-mile capacity. If higher oil prices are fed into this market environment it could fuel quite significant inflation. Of course, inflation is heavily influenced by monetary dynamics, however, much of the world is experiencing extraordinary monetary conditions suggesting that the conditions for inflation could emerge. If so, the logistics sector could not just see higher prices internally but may also act as a means of transmission of higher prices to the rest of the economy.

Source: Transport Intelligence, January 12, 2021

Author: Thomas Cullen