Market commentary Oil at nearly USD60: why?

Crude oil crossed USD55 per barrel and accelerated further in the wake of Saudi Arabia's crackdown on corruption. Will oil price continue to increase? What are the likely impacts for investors.

21 Nov 2017

Taking a step back, had the news from Saudi Arabia been met with genuinely increased geopolitical risks, we would have expected to see the VIX, a key measure of risk aversion, spike higher.

However, the VIX remains around 9, a historically low number, suggesting that such sentiment is not apparent at the moment and spillovers to risk assets should be limited. We will watch geopolitical developments closely, but at this point are not particularly concerned.

Rather, our perception is that recent oil price moves are much more a reflection of genuine changes in fundamentals as opposed to major geopolitical risk. As such, it is reasonable to expect that this will take care of itself over time as US and Canadian suppliers (not bound by OPEC accords) ramp up their output. In that case, the main effects could be a temporary increase in top-line inflation and an increase in US capital expenditure by energy firms. Higher oil prices may boost breakeven inflation expectations on the margin, contributing to a modest rise in yields. Barring a further sharp rise in oil prices, consumers and businesses should continue to drive growth in the economy.

We remain overweight global equities and underweight fixed income in our multi-asset portfolios.


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