Oil prices are increasingly likely to rise towards the end of the year and into 2024, which could hit your investment portfolio. Saudi Arabia recently announced that oil production cuts can “absolutely” continue past the first quarter of 2024 if necessary, and amid growing tensions in the Red Sea.
The OPEC+ reductions to oil production announced last week of more than 2 million barrels a day – half of which come from Saudi Arabia – could run past the first quarter, according to the country’s Energy Minister. Although the cuts have had little impact on prices so far, it could be reasonably expected that as the cuts continue, they will begin to fuel price rises – especially as there’s no obvious sign that the Saudis are in a rush to remove the reductions to the oil they send to the rest of the world.
Disruption to oil supplies
Another factor is the potential disruption to oil supplies, with reports saying that attacks on commercial shipping routes in the Red Sea are on the rise.
The oil market has to date seemingly brushed off the increasing fears of soaring disruption, but the Red Sea is critical – all oil from the Middle East to Europe goes through it – and there are heightening issues in the region.
The Pentagon last weekend said a US warship and three commercial vessels had come under attack off the coast of Yemen. This is driving concerns that Houthi rebels and their backers in Iran were intensifying their agenda as a result of the war in Gaza.
A growing likelihood that oil prices will rise
As a critical component of industrial production, transportation, and energy generation, oil plays a pivotal role in shaping global financial markets. Rising oil prices often lead to increased production costs across various industries. As businesses face higher expenses for transportation and raw materials, these costs are frequently passed on to consumers, contributing to inflationary pressures.
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Also, oil is priced in US dollars, and as oil prices rise, countries that are net importers of oil experience an increase in their trade deficits. This can lead to depreciation in the value of their currencies, affecting foreign exchange markets. Investors holding assets denominated in these currencies could experience declines in the value of their portfolios.
Companies operating in energy-intensive sectors, such as transportation, manufacturing, and agriculture, may witness a decline in profitability as input costs rise. This, in turn, affects corporate earnings and can lead to changes in stock prices.
There looks to be a growing likelihood for oil prices to rise over the next six months due to the possibility of the extension of production cuts and increasing geopolitical tensions. The intricate relationship between oil and global financial markets underscores the need for investors to stay vigilant and possibly adapt their strategies and portfolios accordingly.
