Daily Brief: If OPEC+ Won’t Do Much About Oil’s New High, Central Banks Sure Will

Daily Brief: If OPEC+ Won’t Do Much About Oil’s New High, Central Banks Sure Will

over 2 years ago3 mins

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Oil’s price hit a seven-year high over the weekend, but the world’s biggest producers don’t seem in a hurry to do much about it…

What does this mean?

There’s a serious shortage of coal and natural gas right about now, and countries’ stockpiles of the fuels are running low too. That’s sent prices soaring, which has forced companies to switch to a more affordable alternative: oil. Trouble is, that demand is now pushing up its price too, with a barrel of the slippery elixir hitting $80 a barrel for the first time since 2014.

Oil price

There is a plan to keep its price down, it’s true: OPEC+ – the group of major oil-producing countries – intends to increase supply by 400,000 barrels a day. But economists aren’t sure that’ll be enough, and investors were hopeful the group might agree to boost supply by even more when it met last week. Not quite: OPEC+ announced that it’s sticking to the plan.

Upward momentum

Why should I care?

For markets: The Bank of England admits defeat.

Oil is essential to pretty much everything from transport to manufacturing, so a pricier barrel makes goods across the board a little more expensive too. Cue the Bank of England, which warned over the weekend that it’ll probably be raising interest rates much sooner than expected. That’ll make it more expensive for companies and households to borrow, which should put the kibosh on spending and slow down price rises.

The bigger picture: The price isn’t right.

Those price rises are hitting everyday consumers too, especially now that governments are rolling back their pandemic support packages. That might partly be why Goldman Sachs is suddenly less confident about the US recovery: the investment bank cut its economic growth forecast for 2021 from 5.7% to 5.6% over the weekend, and its 2022 forecast from 4.4% to 4.0%.

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US Companies Have Spent Record Amounts On Buybacks

Buyback image

US companies are all me, me, me these days: data out on Monday showed they’ve spent record amounts buying back their own shares this year.

What does this mean?

Cast your mind back to early last year: sourdough starters were our new best friends, a walk round the block was a big night out, and companies were holding their breath and tightening their belts. This year, though, they’ve been all about splashing out: US firms spent a record $870 billion in the first nine months of this year buying back their own shares. That’s 6% more than 2018’s previous record, and three times more than over the same period last year.

US buybacks

Why should I care?

For markets: Don’t be fooled.

Buybacks are a good thing for investors, reducing the number of shares on the market and pushing their price up. But they’re also a bit of a red flag. See, companies often use their spare funds to grow their businesses or buy out competitors. So the fact that so many have opted for buybacks – especially at a time when shares are so expensive – suggests they can’t find any investments that’ll benefit their long-term growth. That could lead to slower profit growth further down the line.

For you personally: Buy the dip?

Investors sent US stocks down 5% from their September highs last week – the most in almost a year – as they started to worry that the post-pandemic recovery had passed its peak. But JPMorgan and Goldman Sachs are more optimistic: both investment banks just argued that inflation – which they think is the biggest obstacle to the recovery – is only temporary, and that now could be the perfect time to buy in while the going’s cheap.



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