When oil surged above $90 a barrel a few days ago, observers attributed it to military tensions between Israel and Iran. However, the underlying reasons for the oil price increase run deeper. Global supply shocks have worsened, intensifying fears of a resurgence in commodity-driven inflation.

Mexico’s recent decision to reduce its crude exports exacerbates the global situation, prompting U.S. refiners, the world’s largest oil producer, to consume more domestic barrels. Mexico’s oil shipments, a major supplier to the Americas, plummeted by 35% last month, reaching their lowest level since 2019. The country’s exports of sour crude, heavy crude for which many refineries are designed, are now at risk of further decline as the state-controlled oil company Pemex has cancelled some supply contracts with foreign refiners. This decision has shaken oil markets worldwide.
Several oil indices have surged to multi-year highs. Mars Blend, an index of medium-density crude from the U.S. Gulf Coast, recently reached a multi-year premium over West Texas Intermediate, the lighter national benchmark. The price of Canadian Cold Lake oil on the Gulf Coast traded at its narrowest discount to WTI in nearly a year. Key indicators of Middle Eastern medium sour crude, such as Oman and Dubai contracts, have also rebounded.

Before Mexico’s decision, there were a series of supply disruptions. In January, a deep freeze crippled U.S. crude production and inventories at a time when they would normally have increased, keeping inventories below seasonal averages until late March.
Mexico, the United States, Qatar, and Iraq had also collectively reduced their oil flows by more than one million barrels per day in March. At the same time, Baghdad committed to limiting its production to compensate for previous non-compliance with commitments to the Organization of the Petroleum Exporting Countries and its allies.
Adding to this situation, the United Arab Emirates, an OPEC member, reduced its Upper Zakum shipments, a medium sour crude, by 41% in March compared to last year’s average.

European crude markets, meanwhile, have been under pressure from Houthi attacks in the Red Sea. These attacks have diverted millions of barrels of crude through Africa, delaying some supplies by several weeks. Disruptions to a critical North Sea pipeline, unrest in Libya, and a damaged pipeline in South Sudan have also contributed to the rebound. At the same time, U.S. sanctions have deprived Russia of tankers that previously transported its oil to buyers, including India.

The supply shortage could become even more acute in the coming weeks. As President Nicolas Maduro shows no signs of following through on his promises for free and fair elections, the Biden administration could reimpose sanctions this month.

All these elements are gaining momentum at a time when the world’s largest economy demonstrates unexpected vigour. This crisis is accelerating the rise in oil prices as the summer season approaches in the United States, threatening to push Brent crude, the global benchmark, to $100 for the first time in nearly two years.
This amplifies inflationary concerns that cloud the re-election prospects of U.S. President Joe Biden and complicate central banks’ deliberations on rate cuts.

The contrast is stark, as it was just a few months ago when oil plunged to its lowest level as U.S. production increased and Russian crude exports by sea rose despite sanctions, which have since been expanded. The U.S. Energy Information Administration, after forecasting that global stocks would remain unchanged this quarter, now predicts they will decrease by 900,000 barrels per day. That’s equivalent to Oman’s production.

Supply compression comes as demand rises. U.S. refiners are gearing up to increase fuel production for the summer when millions of Americans hit the roads and gasoline consumption peaks. In Asia, refining margins are about 50% above the five-year seasonal average, suggesting healthy demand.

The rise in crude oil prices has undermined the Biden administration’s plans to replenish U.S. emergency oil reserves, which reached their lowest level in 40 years after an unprecedented reduction following Russia’s invasion of Ukraine. It is also a political risk for Biden, as food and energy prices remain stubbornly high. The rise in oil threatens to push retail gasoline, now close to an average national daily of $3.60 a gallon, toward $4, a critical psychological level. This helps fuel fears that commodities could reverse the recent slowdown in consumer price increases. Oil prices are now driving U.S. inflation after subtracting from inflation at the end of last year. A Bloomberg index of major commodities has reached its highest level since November. This will materialise in the inflation figure in the coming month.

The Gaza war and rising tensions with Iran are undoubtedly real, but they are not the primary reasons for the recent evolution of oil prices. It is undoubtedly a market with strong fundamentals whose price is currently underestimated in view of supply. This comes at the worst time for central bankers worldwide.