The price collapsed to $20 a barrel during the worst of the Covid pandemic but has come storming back as global economies recovered.
The United Arab Emirates refused Saudi Arabia’s demands to increase production, leaving the meeting collapsing with no decision.
Some analysts are now predicting oil will climb to $100 a barrel. Economists said surging oil prices threaten to destabilise the world economy’s fight back from the Covid doldrums. As well as being key to the cost of powering factories, oil and its associated products form a key element in most consumer goods.
Only today, CIPS figures for the booming construction industry talked of “rapid cost inflation” in June amid supply shortages of cement, concrete, plaster, steel and roof tiles. Disruption to trade from the EU was cited as a key factor.
At a time when labour costs and supply blockages are already driving inflation northwards, higher oil prices pose a massive headache for central bankers.
Interest rates across most of the world are at or near zero and many nations have multi-billion-dollar quantitative easing programmes to keep credit flowing to businesses. Both measures are inflationary, but the central banks refuse to ease back on the measures even as consumer prices rise. They have steadfastly reasoned that the current spikes in inflation are temporary and will fall back as Covid disruption eases.
MUFG economist Lee Hardman said: “Undoubtedly the rise in crude will lift inflation until the end of the year.”
However, he added that, longer term, the ruckus in Opec could lead to lower prices next year.
As UBS analysts also pointed out, UAE made clear it did not object to increased production of two million barrels a day, but merely wanted a bigger allocation of the production increase for itself.
That suggests that, if Opec completely breaks down, UAE will begin pumping more than ever, putting downwards pressure on the global price of oil as the row plays out over the next year.
As MUFG said: “The market is screaming for more oil — it may come anyway.”
Shares in oil majors gained today, with Shell and BP both up around 1%.
Last time Saudi Arabia and UAE clashed over oil production levels, the UAE threatened to quit the cartel.
Although the two sides ended up with a truce, this time tensions ran higher, with the sides even agreeing on the next date for a meeting. Even before the Opec debacle, Deutsche Bank analysts had said oil could jump to $80.