What’s going on?
The oil price hit a six-year high on Tuesday, after discussions between the world’s biggest oil-producing nations and their allies – known as OPEC+ – heated up and broke down.
What does this mean?
OPEC+ first rolled out a host of production cuts during the pandemic in an effort to boost the oil price, and it met again last week to discuss finally dialing them back. But the talks were scuppered by a disagreement between Saudi Arabia – the group’s de facto leader – and the United Arab Emirates.
Short of a change of heart, that means current production limits will stay in place for at least another month. That’s not ideal: this tiff is depriving pandemic-battered economies of the oil they need to get back on their feet. The prospect of a major imbalance of supply and demand, then, sent oil’s price to almost $80 a barrel – its highest since 2014 (tweet this).
Why should I care?
For markets: A man’s word is his – never mind.
Production limits are more of a gentleman’s agreement than anything: OPEC+ members don’t have to stick to them. And with prices soaring and profits up for grabs, they might be tempted to get back to pumping. That’s raising the specter of last year’s price war, when they went flat out and sent prices crashing. Investors, for their part, seem wary of exactly that: the prices of oil futures contracts are lower than the current price of oil, suggesting they think the dusky nectar will be worth less down the line.
The bigger picture: The ECB shakes things up.
Higher oil prices – which increase the costs of energy and gas – tend to lead to higher inflation, so the world’s central banks will be keeping a close eye on how the situation gets resolved. None more so than the European Central Bank, which is meeting this week to discuss tweaking its inflation target – a shift in strategy that’d be one of its most significant in two decades.