Sustained higher oil prices are often associated with strangling economic growth, but our energy-rich country means this will be mitigated.
From an investment perspective, higher energy commodity prices historically result in higher stock prices for those companies leveraged to this. On the downside, it will toughen the cost of everyday living.
Overnight we saw major US energy producers strengthen – Chevron Corporation was up 2.5 per cent and Exxon Mobil Corporation 2.3 per cent. Coal miner Peabody Energy Corporation was up 0.51 per cent. Australian companies with similar exposure should follow this lead while oil and other energy prices keep climbing higher. Domestically, oil-producer Oil Search is one to watch.
Of the coal miners, New Hope Corporation and Whitehaven Coal Limited would both welcome some renewed interest as they have been struggling while the coal price remains depressed. Although the coal price is at six year lows, the prevailing geopolitical tensions will put some upward pressure on prices.
The graph below shows the spot price movements of both oil (white line) and coal (green line).
The most direct by-product of higher oil prices is an increase in the petrol price. This will ultimately become problematic for other sectors of the economy that fight for consumer dollars. So if prolonged, we could see further pressure on sectors leveraged to consumer spending.
Blythe points out, most people can’t cut back on motor spending but also says higher prices need to be sustained to actually change consumer behaviour.
The future of the oil price will be driven by geopolitical events. The consensus is oil prices are going higher from here, however how high and for how long is the great unknown.
For now, we can say it will challenge consumers but provide some benefit to investors.