The price of WTI oil is up from around $80 in August to $91.54, similarly brent crude oil is up from $84 to $95 last week.

These sudden increases in the oil price are not great news for inflation in the short term…

Energy and fuel are some of the greatest components of our inflation basket.

If fuel prices rise, so do transport costs, food production costs, fertilizer costs, the list goes on…

And when inflation rises – so do interest rates. Which isn’t something any of us need right now.

But why are oil prices rising?

The Organization of the Petroleum Exporting Countries (OPEC) is limiting oil production (specifically Saudi Arabia).

According to a CNBC report: Saudi Arabia’s energy minister said Riyadh and Moscow’s decision to extend crude oil supply cuts is not about “jacking up prices,” as Brent futures hover near $95 a barrel and analysts predict further rises into triple digits.

Some members of the Organization of the Petroleum Exporting Countries and its allies, known as OPEC+, are implementing 1.66 million barrels per day of combined voluntary declines — which falls outside of unanimously agreed OPEC+ policies — until the end of 2024. Topping this, Saudi Arabia and Russia announced they will apply respective voluntary declines of 1 million barrels per day of production and 300,000 barrels per day of exports until the end of the year.

Simply put – production cuts by some of the world’s largest producers means a tight supply market, and higher prices.

That said – they are far from running out of oil. This is more about avoiding an oversupply.

Sure, in the short term it hurts. Oil prices are higher, and we’ll pay more for fuel every time we fill up our cars.

But by 2024 things will look a bit different again…

Why oil production is set to rise again

Despite what the media says, the USA is still a net exporter of oil.

And with higher prices, and improved technology, the US oil and shale sector is set for huge gains.

According to forecasts by the EIA in the US oil production could increase 850,000 barrels per day in 2023, and a further 240,000 barrels per day in 2024 in the lower 48 states.

That means the US alone will negate a huge portion of the production cuts being implemented right now…

And while the oil price could hit $100 in the short term – we’re more likely to see $86-$90 oil by end of the year. High, but manageable.

The Permian Basin in the US has a break even point around $50 – so as long as we see oil above that level, increases in production are highly likely.

According to the International Energy Agency “Global upstream investments in oil and gas exploration, extraction and production are on course to reach their highest levels since 2015, growing 11% year-on-year to USD 528 billion in 2023. While the impact of higher spending will be partly offset by cost inflation, this level of investment, if sustained, would be adequate to meet forecast demand in the period covered by the report.”

Combine that with replacement of fuel with electric cars – even though it is slow – and the supply/demand for oil isn’t nearly as unbalanced as the current price suggests…

For now – inflation remains stubborn because of high oil prices

If you were wondering how this affects you – inflation will remain stubbornly high because of the higher oil price.

That means even though we’d love to see it, interest rates will remain at their current levels for some time longer.

Many economists are predicting a ‘higher for longer’ term for interest rates.

If you haven’t already adjusted your portfolio – you want to make sure the companies you are invested in can handle high interest rates.

Also – keep in mind that agriculture and logistics businesses are especially sensitive to high fuel costs… And that with loadshedding, and generators guzzling, local SA businesses will be especially hurt until the fuel price tapers off again.

PS. To find out which stocks I’m doubling down on, to profit in the current high inflation, high interest rate economy, go here.

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