Oil price surge could force central banks to hold interest rates higher for longer

Surging oil prices are likely to mean higher interest rates for longer as the price rally adds to inflationary pressures, warns the CEO of one of the world's largest independent financial advisory, asset management and fintech organisations.

The warning from deVere Group's Nigel Green comes as 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, which are primarily located 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. This is a significant reduction in a market in which supply was expected to be tight for the second half of 2023," says Nigel Green.

"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.

"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."

He continues: "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."

The deVere CEO has reiterated that when costs are going up, investors should increasingly be looking at a company's and a sector's ability to maintain margin.

"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.

"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."

Previously, he has suggested that these 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.

"Healthcare is a robust sector as people will always need to stay healthy – this has come into focus more than ever since the pandemic. Also, despite wider market volatility, there's strong earnings potential due to ageing populations and other demographic changes. Plus, healthcare is becoming increasingly tech-driven, which offers fresh opportunities."

He goes on to say: "Luxury goods can maintain margin due to the inherent aspirational 'elite and exclusive' aspect of the sector. 

"Agriculture is another one as populations in emerging markets around the world are eating more meat. As they eat more meat, there needs to be more grain produced."

Nigel Green concludes: "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."

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