The price of oil jumped as much as 8% at the open Monday as OPEC+ announced a surprise cut in production of more than one million barrels a day.
The OPEC+ group includes 13 OPEC member countries, which are primarily located in the Middle East, and 10 non-OPEC countries, including Russia, Mexico, and Kazakhstan. The group's decision-making process is led by Saudi Arabia, the de facto leader of OPEC, and Russia, the largest non-OPEC producer.
It’s a shock move by OPEC+ as the cartel had previously vowed to maintain a steady supply. This is a significant reduction in a market in which supply was expected to be tight for the second half of 2023.
The production cuts could see prices close to $100 a barrel due to demand from a reopening China and as Russia has slashed production due to sanctions from the West.
The dramatic cut will only add to pressing global inflationary squeezes. The oil price rises can be expected to increase the cost of production and transportation, reduce consumers’ purchasing power, disrupt supply chains, and lead to higher inflation expectations.
There’s real concern that the surprise decision announced by Saudi Arabia for OPEC+ will prompt central banks to maintain interest rates higher for longer, due to the inflationary impact, which will hinder global economic growth.
When costs are going up, investors should increasingly be looking at a company’s and a sector’s ability to maintain margin.
Investors should be paying close attention to margin because it can indicate how well a company is managing costs and competing in its industry. It can also impact a corporation’s ability to invest in growth opportunities or pay dividends to shareholders.
In this environment, some companies are going to find it difficult to maintain margin and, as such, investors need to be looking at sectors that can maintain margin, despite sticky inflation.
Previously, I’ve suggested that these include energy, healthcare, luxury goods, and agriculture. We'll look at energy because there’s already a shortage of energy in the world right now and the OPEC+ move exacerbates this.
Healthcare is a robust sector as people will always need to stay healthy – this has come into focus more than ever since the pandemic. Also, despite wider market volatility, there’s strong earnings potential due to ageing populations and other demographic changes. Plus, healthcare is becoming increasingly tech-driven, which offers fresh opportunities.”
Luxury goods can maintain margin due to the inherent aspirational "elite and exclusive" aspect of the sector.
Agriculture is another one as populations in emerging markets around the world are eating more meat. As they eat more meat, there needs to be more grain produced.
The surprise oil output reduction poses a threat to the global economy. However, as ever, where there is volatility, there is opportunity for investors who seek advice.
London-born Nigel Green is founder and CEO of deVere Group. Following in his father’s footstep, he entered the financial services industry as a young adult. After working in the sector for 15 years in London, he subsequently spent several years operating within the international space, before launching deVere in 2002 with a single office in Hong Kong. Today, deVere is one of the world’s largest independent financial advisory organizations, doing business in 100 countries and with more than $12bn under advisement. It specializes global financial solutions to international, local mass affluent, and high-net-worth clients. In early 2017, it was announced that deVere would launch its own private bank. In addition, deVere also confirmed it has received its own investment banking license.
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