It’s impossible to understand today’s economy and markets without a clear perspective on global supply chain disruptions. From computer chips to the availability of workers, supply bottlenecks are raising concerns around economic growth and inflation. One major contributor to these worries is the energy sector. Oil prices are rising above $80 per barrel, the highest since 2014.
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What are the implications for investors?
Even as investors focus more and more on renewable energy sources, the world is still primarily driven by fossil fuels. The International Energy Agency (IEA) estimates that global oil demand was 100 million barrels per day before the pandemic and could recover to 96.2 million barrels per day by the end of 2021. The sharp economic rebound has helped to boost demand after oil prices plummeted during the pandemic.
Global forces are at play pushing prices higher
OPEC and Russia (known collectively as OPEC+) have raised production only modestly and US producers haven’t filled the gap. Dwindling natural gas supplies and inventories are expected to spill over into oil markets. Places like the UK are dealing with gasoline shortages, and China is suffering rolling blackouts. Altogether, these forces are pushing energy prices higher.
Chart: Oil prices are rising alongside other energy costs due to supply constraints
Sources: Clearnomics, Refinitiv
How can rising energy prices affect your portfolio?
While it’s normal for energy costs to rise over the course of a business cycle (as they did before 2008 and during the last cycle) today’s situation is somewhat unique:
- Today’s oil and natural gas prices are symptomatic of supply chain issues facing almost all industries. Not only are shortages of raw materials and labor impacting production and manufacturing, but logistics are hamstrung with container ships stuck waiting to unload.
- Higher energy prices are negative for US consumers and businesses since they boost the cost of products and services directly and indirectly. Gasoline, for instance, has risen from a nationwide average of around $1.75 a gallon to over $3.25 today. However, it’s also the case that energy prices, including gasoline, have been relatively low for much of the past seven years.
- From an investment perspective, the energy sector has been a volatile component of diversified portfolios. The shale revolution which began in the early 2010’s, has faced many ups-and-downs as oversupply became an issue before the pandemic. This led to the underperformance of the sector for years, which most likely caused some investors to avoid energy-related assets.
Rising oil prices are both a reflection of supply chain problems as well as a factor that may continue to directly impact consumers and businesses. There are reasons to believe that the economy can still grow steadily, especially if more supply can come online. Long-term investors ought to stay diversified and focused on the underlying issues rather than the day-to-day movements of energy prices.
This material, as well as the insights and data within, have been provided to MoneyLion by Clearnomics, Inc.
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