The price of US crude oil hit a fresh seven-year high on Monday on fears that fuel demand was recovering faster from last year’s economic slowdown than producers could bring supply to the market.
West Texas Intermediate, the US crude benchmark, hit a high of more than $82 a barrel, its highest level since 2014, before pulling back to $80.55 in mid-afternoon trading.
Oil prices have climbed more than 16 per cent since the start of September, encouraged by a global economic rebound and a shortage of natural gas that has increased demand for other energy sources.
The rally hit a brief speed bump last week when Jennifer Granholm, US energy secretary, told the Financial Times that the Biden administration was considering tapping into the nation’s strategic stockpiles to help ease surging fuel prices.
American consumers are paying more for fuel at the pump than they have since 2014, a political liability for an administration that has seen its popularity drop.
However, price rises resumed after the Department of Energy added on Thursday that there was no plan to release government-held supply “at this time”, reviving worries of tight supplies that have continued into this week.
“The market is gripped by fears — fear of stronger demand, fear of a rally contagion from gas and power, fear of missing out on the rally, and the fear to rule them all: supply anxiety,” said Roger Diwan, an oil analyst at consultancy IHS Markit.
The price moves led to a mixed day for US and European stock markets.
The boost to energy stocks was initially enough to lift the entire S&P 500, overriding concerns about the effect of inflation on the wider market. However, the blue-chip index fell back into the red as the oil price gave up some of its earlier gains, and was down 0.3 per cent by mid-afternoon.
The tech-heavy Nasdaq Composite was flat.
The energy- and mining-heavy FTSE 100 index enjoyed the biggest boost among big markets in Europe, rising 0.7 per cent, while the broader region-wide Stoxx 600 inched up 0.1 per cent.
Rising energy prices have exacerbated concerns that recent high inflation rates will not be transitory, increasing the likelihood of interest rate rises and leading to an increase of the yields demanded by investors in government bonds, which rise when prices fall.
Yields on Germany’s benchmark 10-year Bund and Britain’s 10-year gilt each rose 0.03 percentage points on Monday, to negative 0.12 per cent and 1.19 per cent respectively. The gilt yield briefly hit 1.2 per cent for the first time since May 2019.
“The bond market is very focused on the UK as they look likely to raise [interest] rates quite rapidly,” said Anne Beaudu, global fixed income portfolio manager at Amundi.
US Treasury bond markets were closed for the Columbus Day holiday.
Economists polled by Reuters expect data published on Wednesday to show US consumer prices rose 5.3 per cent in September from the same time last year, marking the fourth consecutive month that headline inflation in the world’s largest economy has topped 5 per cent.
Prolonged inflation has piled pressure on the Federal Reserve, which has already signalled it is ready to wind down its $120bn a month of pandemic-response bond purchases, to raise US borrowing costs from record lows.
“This creates an environment that is ripe for monetary policy mistakes,” said Gregory Peters, head of multi-sector and strategy at bond investor PGIM.
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“The costs of petrol and heating and all the things plaguing global supply chains are exogenous factors that central banks have nothing to do with.”
Financial markets, Peters added, had priced in economic stagflation that could be caused by rate increases quashing growth as central banks potentially “turned dogmatic”.
In energy marks on Monday, European gas contracts for November delivery stood at €83.75 per megawatt hour, about double the level they traded at in mid-August. Brent crude, the main international benchmark, topped $84 a barrel on Monday, its highest since October 2018.