We had hoped that OPEC would announce a further increase in their output quotas following their October meeting to help satisfy the recovering demand, but unfortunately the cartel simply stated that it would stick to its previously announced increase of 400,000 barrels a day from November.
Consequently, this is likely keep the energy market extremely tight – and as a result, the price of a barrel of Brent crude now trades back above $80 for the first time since October 2018.
A higher oil price doesn’t simply mean higher petrol pump prices: oil accounts for a large proportion of the total cost to produce all sorts of everyday products from plastics, household products and clothes, not to mention the energy to produce food (fuel, electricity, fertiliser and pesticides) and metals (energy accounts for a large percentage of a mine’s operating cost and, for example, the production of aluminium).
As such, this is likely to mean that the transitory inflation we are currently experiencing (due to supply chain constraints) is likely to last slightly longer!
On a positive note, with oil trading above $80 a barrel, we would expect the US shale oil producers to start increasing production – which should put a ceiling on the oil price.
Additionally, while this could result in transitory inflation for longer, higher interest rates won’t do anything to solve the problem: higher interest rates won’t result in an increase in the number of lorry drivers; or make the winter weather warmer; or provide more capacity at the world’s ports; or increase the capacity for semiconductor production – and although central banks are itching to increase interest rates, we believe common sense will prevail as the rise in energy prices will reduce our disposable income and if interest rates were to increase significantly, it could impact household financial stability, especially in the UK given the end of the universal credit uplift, coupled with next year’s planned increase in National Insurance rates.
Investment Management Team