Why oil may not be a big factor in inflation - Yahoo Finance

Why oil may not be a big factor in inflation

The International Energy Agency has boosted its oil demand growth forecasts for 2023 to year's end and 2024. This news comes after the fluctuation in energy prices following rising tensions in Middle Eastern conflicts last month, eventually leading to subsiding gas prices outlined in October's CPI print.

Macquarie Group Global Energy Strategist Vikas Dwivedi sits down with Yahoo Finance to analyze the oil market's reaction to recent Middle East conflicts and the price forecasts for gasoline.

"This market is not as excited about paying for conflict and the potential supply disruptions that come with wars and other types of disruptions, because, over the past several episodes of big breakout issues, supply has not been disrupted," Dwivedi explains, calling OPEC's oil supply to be a risk for inflation, but not "an outsized factor" for inflation.

Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.

Video Transcript

SEANA SMITH: So let's talk about what's ahead for the oil market because I think there's lots of questions just exactly what prices are going to look like going forward. When you take a look at where things are today, much lower-- we have oil just below 80 bucks a barrel, much lower than maybe we had braced ourselves for given the conflict that started just over a month ago. So what does this tell us then about the prices between now and year end?

VIKAS DWIVEDI: Yeah. Well, we think it tells us is that this market is not as excited about paying for conflict and the potential supply disruptions that come with wars and other types of disruptions. Because over the past several episodes of big breakout issues, supply has not been disrupted. So I think that's why we saw a very limited response once the Middle East tensions really broke out and then it didn't even keep that limited response, it kind of gave it all back and then some.

The market is also grappling with how much OPEC production and how much OPEC supply is actually making it out to the marketplace. The cuts were real, and I think they still are real, but there seems to be slippage and there seems to be more oil in the market than the cuts would have implied.

BRAD SMITH: To what extent are you anticipating that the supply issues would continue to be a headwind risk for inflation as well?

VIKAS DWIVEDI: Yeah, that is a-- it's a risk, but we have been on the view that oil supply is plentiful. The underinvestment thesis that so many have been thinking is the state of affairs, we have disagreed with that. We think the market has invested enough in oil supply, and supply can respond to prices. So we don't believe oil will be a big factor in inflation. You know, it is a factor, it never won't be, but--

BRAD SMITH: But not outsized--

VIKAS DWIVEDI: Not an outsized factor. Yes, exactly.

SEANA SMITH: So what does that then mean for gas prices because we certainly have seen obviously as the price of crude has come down, we've also seen some relief at the pump off just about $0.30, I believe, in the past month alone. Is that steady decline? Can we expect that to continue given the movement that we've seen in crude?

VIKAS DWIVEDI: We think so, yeah. And typically, it takes a while for retail gasoline to come down with wholesale prices. So there's still that lagging effect that will probably show up at the pump over the next few months, you know, unless oil prices really take off again. Obviously, that is a risk always, but if that doesn't happen-- and we don't expect that to happen-- we think the pump price will keep falling.