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Oil Creeping Back Up


Oil Creeping Back Up

Oil prices, after falling from the highs of over $100 per barrel in 2014, had previously struggled to push above $60 per barrel. That has now changed. With Brent crude at north of $80 per barrel, it is now almost double the price it traded at during mid-2017. This has implications not just for oil producers, but for virtually every company reliant on consuming oil-based products.

The Brent crude oil price has been rising strongly recently, boosted in part by stronger economic growth, which increases the demand for oil; as well as supply constraints, with economic crisis disrupting Venezuelan oil supplies, and stricter American sanctions on Iran coming into effect in November. As can be seen by the chart below, the production and consumption balance of world liquid fuels has dipped into deficit, which typically has an upward impact on oil prices.

Screen Shot 2018-10-05 at 3.28.30 pm

Source: Thomson Reuters; US Energy Information Administration; via The Economist

The impact of a large and sustained oil price increase is far-reaching. Not only do higher oil prices affect companies such as oil producers and refiners, but they will have some impact on basically any company that relies on oil as an input into their business. This could mean companies such as those that manufacturer plastics (where oil is a feedstock), airlines, and trucking fleets all experience input cost inflation that could reduce their margins. In addition, higher prices at the petrol pump can also squeeze household budgets and have a negative effect on aggregate demand.

It’s important to remain mindful of developments in the oil market, given the importance of oil as an input cost for the world economy. Oil reaching levels not seen since 2014 will impact companies, consumers, and will likely play into the speed at which central banks chose to normalise interest rates. Investors that fail to monitor changes in a market as important as oil proceed at their own peril.


George joined MGIM in September 2015 as a Research Analyst. Prior to joining MGIM, George was an investment analyst at Private Portfolio Managers where he covered global equities across various industries, using a value investing framework. George’s prior experiences include equities research and investment banking roles at both Citi and Greenhill & Co.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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