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Oil Prices Likely to get Worse Before they get Better

The cost of diesel reached a new record this week of $5.72 a gallon, according to the U.S. Energy Information Administration. Rising oil and fuel costs are adding pressure to the prices of other goods. "Big parts of the economy run on diesel, from agriculture to manufacturing, and thus the surge in diesel prices is driving up prices broadly," Mark Zandi, chief economist at Moody's Analytics, told the Financial Times.

Oil and gas costs have steadily increased over the last several months as a result of the war in Ukraine, supply challenges and increased demand. Fitch Ratings increased its oil and gas price assumptions this week as those problems show no signs of being resolved anytime soon.

"Our raised oil price assumptions reflect disruptions of established supply channels and growing oil demand," per Fitch Ratings. "The EU has banned seaborn imports from Russia, so it will have to replace about a third of all oil imports with supplies from other regions, while larger volumes of Russian oil will go to India and China."

It is unclear if oil prices have peaked or if they will continue to break new records. If costs are pushed much higher, it could carve into global GDP significantly, according to Moody's Analytics. "Gasoline prices at $6 or $7 would be psychological thresholds and would likely weigh heavily on consumer sentiment and potentially increase the economic costs of higher prices at the pump," the report reads. 

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Wednesday, 29 June 2022