The price of one-month Brent is trading close to $121 p/bbl (WTI at $108 p/bbl) this morning and that is making investors in the oil importing economies very nervous. Nervous that the higher energy costs – plus rising interest rates - will soon start to slow global growth. Over the short-term, there is one clear way to play that move; buy Russian oil producers, buy the gas companies, buy the ruble. That’s what investors are likely to do today and we should see that reflected in ETF buying of Russia again this week.
The momentum remains very strongly in support of stocks in the oil and gas sector and with the oil price expected to remain strong, that is not likely to change for now. Our strategic market position is clear; overweight the domestic sectors that benefit from the higher-for-longer oil revenues in the 2nd half of the year and to migrate from the oil and gas sector during the current quarter – more the latter part than today.
But, the more important question is how investors in oil importing economies will react to what is a growing threat to global growth. US investor uncertainty was reflected in a flat session for the S&P yesterday. Asia’s markets are also, on average, not far off neutral today, albeit the headlines are much more about the interest rate threat than about $120 oil. But, if oil continues to climb then we will soon find out the answer – and it will not be good for any market.
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