• Wealth Management

Rising Oil Prices and Your Portfolio

While higher oil can lift energy stocks, it can also foreshadow a downturn in markets.

One of the most notable changes in market conditions since summer ended is the rise in the price of oil. After spending July and August in the low $70s, Brent crude is up to $83 a barrel.

Going forward, supply constraints could continue this trend. Global oil inventories are low and there is minimal spare production capacity among OPEC member countries. The potential to grow production in the U.S. may be overestimated and is currently limited by pipeline capacity. Plus, new sanctions on Iran seem imminent. Morgan Stanley & Co. equity analyst Martijn Rats believes Brent could average $85 a barrel over the next three-to-six months.

There are a few reasons investors should take note of rising oil prices:

  • Higher oil usually leads to higher prices for energy stocks. I recommend investors overweight energy, not just because of rising oil prices, but also because it is a defensive sector that is likely to hold up better than most other sectors if the market falters.
  • Rising oil prices contribute to inflation, which can lead to higher interest rates. Inflation expectations are muted now, but with wages rising, unemployment low, more tariffs likely and the dollar weakening, I expect more pricing pressure ahead. That could prompt the Federal Reserve to get more hawkish about raising rates. The yield on the 10-year Treasury note recently climbed to 3.1%. If it rises much further, that could be a negative for markets
  • Strong oil prices often coincide with a recession. Rising oil increases costs for businesses and consumers. Higher gas prices can crimp consumer spending. Almost every recession for the last 80 years has coincided with higher oil.  

Bottom Line: This is a good time for investors to emphasize the energy sector since oil prices are higher and likely to head higher still. Plus, the sector should provide good defensive positioning if inflation continues to climb.