Following a surprise additional voluntary cut of oil supply by some OPEC+ members in September 2023, the Brent crude oil price skyrocketed to over US$90 a barrel and U.S. West Texas Intermediate (WTI) crude, which generally moves in tandem with Brent, increased to about US$87 a barrel.
However, by the end of 2023, these oil prices had dropped significantly. WTI had dropped to as low as $72 a barrel by December 2023.
Surprise Increase in Oil Prices in 2024
And then suddenly between January 2024 and today in March 2024, oil prices have increased again and WTI is at $83 a barrel.
This has been primarily due to limited oil supply by producers who can’t keep up with demand as well as geopolitical tensions and wars in the Middle East that have ratcheted up in 2024.
What is the Difference between Brent Crude and WTI?
Brent Crude Oil is extracted from the North Sea near Europe. Brent is considered a better indicator of global oil prices.
WTI Crude Oil is extracted from fields located in Texas, North Dakota, and Louisiana. WTI is considered the main indicator of North American oil prices.
Inflation
Since many products are produced and transported with fossil fuels, and even human travel by road and air is affected by the price of oil in the form of gasoline prices, increasing prices will increase the inflation rate.
In this way, business expenses increase. This is not good for a business owner or entrepreneur who needs to reduce his costs.
In a nutshell, increasing oil prices increase inflation.
Central Banks and Inflation
Central banks such as the Bank of Canada and the Fed in the United States are keen to reduce inflation to manageable levels, generally between 2% and 3%.
So far, since 2022, inflation rates have been coming down. And central banks have signaled that they intend to cut their base interest rates in 2024.
These expected decreases would reduce loan interest rates paid by businesses and individuals. Banks and private lenders charge a premium above these base rates to borrowers. As such, the lower the base rate, the lower the overall loan interest rate.
These new early 2024 inflation spikes could disrupt the plans of central banks as they slow down the pace at which they cut interest rates in 2024.
This would in turn, at the very least, maintain interest rates where they are right now.
This is, of course, not good news for business owners that were expecting to be able to reduce their expenses as central banks reduced their interest rates later this year.
How Will Oil Prices Move in the Future?
Nobody can predict the future but the hope is that these oil price spikes are temporary and eventually the prices will stabilize or decrease once again.
As such, business owners must pay close attention to news about the macroeconomic environment as oil prices, inflation rates, and interest rates affect the day-to-day operations of their businesses for better or worse.
If you have trouble navigating these complex issues in this volatile global economic environment, it’s always best to engage experienced competent business loan brokers in Canada to help you solve your business debt and credit problems.