Low oil prices may not return soon, meaning investors, businesses, and consumers will face higher cost pressures over the long term. A new supply safety premium may keep inflationary pressures persistent, delay rate cuts, and reshape the global market landscape.
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Key Takeaways
- Key points:
- Investors are finding it increasingly difficult to expect oil prices to quickly return to pre-war levels.
- Persistently high crude oil prices may be passed on to inflation, borrowing costs, and the market.
- Investors are weighing the ongoing supply threat against weak demand in major economies.
The new safety premium for crude oil puts inflation and rate cuts at risk
Low oil prices may not return anytime soon. Nigel Green, CEO of Devere Group, said on June 1 that investors should prepare for short- and medium-term changes in energy prices, which will put pressure on inflation and expectations of rate cuts. He believes investors underestimate the supply safety premium, which could reshape returns for stocks, bonds, currencies, and commodities.
After Israel ordered troops to advance into Lebanon's interior, Brent crude prices hovered around $93 per barrel, raising market concerns that conflict with Hezbollah could jeopardize the fragile U.S.-Iran ceasefire efforts. Earlier in the early stages of the crisis, Brent crude prices climbed above $112 due to market expectations of possible disruptions to major energy transport routes. Green said investors may be too confident that oil prices will fall once the situation eases.
"Many investors believe that once the situation eases, oil prices could quickly fall back to pre-war levels," Green said, warning:
"We believe this assumption is becoming increasingly difficult to hold. The energy market is pricing in a new reality: supply security is being given a significant premium. ”
The latest moves for Brent crude and the US crude benchmark West Texas Intermediate (WTI) indicate how quickly traders will reprice crude oil when Middle East tensions threaten supply flows. Oil prices remain below the highs seen during the crisis, indicating that the market is still weighing diplomatic factors and weak demand. Green's warning focuses on long-term risks: even if the fighting eases, the market may still pay a higher price for supply security.
For example,
Rising oil prices may impact the stock market, bond market, aviation industry, and exchange rates
Global oil demand remains near historic highs, exceeding 103 million barrels per day, while by historical standards, idle capacity remains limited. This tight supply-demand balance makes the market vulnerable to minor supply disruptions. Green believes this helps explain why crude oil prices may remain high even after short-term tensions ease, especially considering that about 20% of global oil consumption is transported through the Strait of Hormuz.
Rising crude oil prices will quickly ripple through the global economy. Fuel prices affect transportation, manufacturing, logistics, food production, and consumer goods industries. If crude oil prices continue to rise by $10, it could increase inflation rates in developed economies by 0.2 to 0.4 percentage points. This could delay the expected pace of rate cuts and put pressure on government bonds, growth stocks, airlines, logistics companies, manufacturers, and oil-importing economies. Green stated:
"We believe that in the foreseeable future, the likelihood of crude oil prices returning to pre-war levels is increasingly low. Adapting to this reality may become one of the most important portfolio decisions for investors in the coming years. ”
Goldman Sachs holds a different view. Its analysts explained that ongoing supply shortages in the Middle East could push oil prices higher, while weak demand could drag prices down. April crude oil sales data from China and Western Europe indicate that, on top of already low demand estimates, there is still about 2 million barrels per day facing downside risks. This analysis highlights the uncertainty facing crude oil demand, despite geopolitical risks still supporting oil prices.