Oil price surge could mean higher interest rates

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Surging oil prices are likely to mean higher interest rates for longer as the price rally adds to inflationary pressures, warned the CEO of a leading financial advisory and fintech.

The the price of oil jumped as much as 8% at the open on Monday as OPEC+ announced a surprise cut in production of more than one million barrels a day.

The OPEC+ group includes 13 OPEC member countries, mainly in the Middle East, and ten non-OPEC countries, including Russia, Mexico and Kazakhstan. The group’s decision-making process is led by Saudi Arabia, the de facto leader of OPEC, and Russia, the largest non-OPEC producer.

“It’s a shock move by OPEC+ as the cartel had previously vowed to maintain a steady supply,” warned deVere Group’s Nigel Green.

“This is a significant reduction in a market in which supply was expected to be tight for the second half of 2023.”

The production cuts could see prices close to $100 a barrel due to demand from a reopening China and as Russia has slashed production due to sanctions from the West, explained Green.

“The dramatic cut will only add to pressing global inflationary squeezes. The oil price rises can be expected to increase the cost of production and transportation, reduce consumers’ purchasing power, disrupt supply chains, and lead to higher inflation expectations.”

Inflationary impact

The deVere CEO added that there’s real concern that the surprise decision announced by Saudi Arabia for OPEC+ will prompt central banks to maintain interest rates higher for longer, due to the inflationary impact, which will hinder economic growth.

When costs are going up, investors should increasingly be looking at a company’s and a sector’s ability to maintain margin, he said.

“Investors should be paying close attention to margin because it can indicate how well a company is managing costs and competing in its industry. It can also impact a corporation’s ability to invest in growth opportunities or pay dividends to shareholders,” Green said.

“In this environment, some companies are going to find it difficult to maintain margin and, as such, investors need to be looking at sectors that can maintain margin, despite sticky inflation.”

Green had previously suggested that these sectors include energy, healthcare, luxury goods and agriculture.

“We’ll look at energy because there’s already a shortage of energy in the world right now and the OPEC+ move exacerbates this,” he noted.

“The surprise oil output reduction poses a threat to the global economy.  However, as ever, where there is volatility, there is opportunity for investors who seek advice,” Green concluded.