A sharp rise in oil prices has occurred recently, which could potentially lead to a resurgence in inflation. This increase in oil prices was prompted by the news that Russia and Saudi Arabia would extend oil production cuts until December. As a result, Brent crude reached $90 a barrel for the first time since last November, and U.S. oil prices have risen by about 10% over the past two weeks. This rise in oil prices has had a direct impact on gas prices, which have been steadily increasing throughout the year. In the Midwest, pump prices are expected to rise by over 50 cents per gallon. Nationwide, gas prices currently stand at $3.82 per gallon, reflecting an increase of more than 18% since the beginning of the year.
From an investment standpoint, rising oil prices have both positive and negative implications. On one hand, our portfolio is overweight in the energy sector, which positions us favorably in the current environment. However, investors are concerned that sustained increases in oil prices could trigger widespread inflation and potentially lead the Federal Reserve to maintain or even raise interest rates. This concern is growing, as evidenced by the latest inflation report, which showed a 0.6% increase in U.S. consumer prices in August – the largest increase in 14 months. Higher oil prices were a major contributor to this rise, with energy accounting for 0.4% of the overall increase. Additionally, higher gasoline prices could have a significant impact on consumer demand. Studies have shown that higher gas prices tend to make consumers more pessimistic about their economic prospects and, consequently, they decrease their spending. Given the crucial role consumers play in maintaining a strong economy, we will closely monitor this factor in the coming months.