Oil price rise may lead central banks to keep interest rates higher for longer
The price of oil rose as much as 8% on Monday following the surprise announcement of a production cut of over one million barrels a day by OPEC+.
As a result, the soaring oil prices will likely mean interest rates will remain higher for longer as inflationary pressures are fuelled by the price rally.
There are 13 OPEC member countries within the OPEC+ group, mainly located in the Middle East, as well as ten non-OPEC countries, including Russia, Mexico, and Kazakhstan. The decision-making is led by Saudi Arabia, OPEC’s de facto leader, and Russia, the largest non-OPEC producer.
As I was quoted by Sky News, Yahoo News, Daily Mail, Proactive Investors, Financial Mirror, Financial Post, Trade Arabia, The State, Canada Today and Zawya, amongst other media, the announcement by OPEC+ came as a shock as the group had previously pledged to maintain a steady supply. This is a considerable reduction in a market where supply was forecast to be tight for the second half of the year.
The cuts in production may see prices close to $100 a barrel due to demand from the reopening of China and as Russia has reduced production due to sanctions from the West.
In addition, the radical cut will fuel global inflationary squeezes. The increase in oil prices will likely hike production and transportation costs, reduce consumers’ purchasing power, upset supply chains, and result in higher inflation expectations.
There’s also a major concern that the OPEC+ decision will lead central banks to hold interest rates higher for longer due to the inflationary impact, which will hamper economic growth.
As such, when costs are rising, investors should look more to a company’s and a sector’s ability to maintain margin, as this can show how well a business is managing costs and competing within its industry.
Furthermore, it can also affect a company’s ability to invest in growth opportunities or pay shareholder dividends.
Within this environment, certain businesses may find it hard to maintain margins and therefore, investors need to focus on sectors that can maintain margins, despite sticky inflation.
As I’ve suggested before, these include energy, healthcare, luxury goods, and agriculture.
In regard to energy, there’s already an energy shortage in the world currently, which is being exacerbated by the latest OPEC+ decision.
Healthcare is a strong sector, as people will always need to remain healthy, which is even more in focus since the pandemic. In addition, despite broader market volatility, earnings potential is strong due to ageing populations and other demographic changes. In addition, healthcare is becoming more and more tech-driven, which brings fresh opportunities.
Moreover, luxury can maintain margin due to the intrinsic aspirational ‘elite and exclusive’ aspect of the sector.
Another one is agriculture, as populations in emerging markets across the globe are eating more meat. As they eat more meat, there needs to be more grain produced.
In conclusion, the oil production cut represents a threat to the global economy, yet where there’s volatility, there’s opportunity for investors who seek advice.