Oil prices are spilling over, rising more than 50% in 2021
Looking ahead to 2022, two narratives will be hard to avoid: One is the ongoing energy crisis, which saw oil, gas and coal prices skyrocketing over the last few months; and, as inflation, which to a large degree is linked to the energy crisis, proves to be a more permanent problem than previously thought, the tightening of monetary policies by some of the world’s main central bank have also taken centre stage.
Looking first at the change in paradigm by the US Federal Reserve and its peers, the situation seems, at least for now, to be well mapped. The consensus amongst analysts is that the Fed will start hiking rates, perhaps as early as in March, and then 2 or 3 times more before the end of the year. Similar dynamics are unfolding in the UK and New Zealand, with the BoE and the RBNZ having already started to lift their respective borrowing reference rates.
But not all monetary authorities sing form the same hymn sheet. The European Central Bank and the Bank of Japan are clearly lagging their Anglo-Saxon counterparts and are expected to remain dovish, meaning they are unlikely to raise rates during this year. And then there is Turkey, a country where, despite an annual inflation reading that reached 36% last month, the central bank decided, under pressure from the nation’s President, Recep Erdogan, to cut rates 4 times during the second half of 2021, bringing them down from 19% to 14%. Mr. Erdogan, who famously considers high-interest rates the “mother of all evil”, is conducting a dangerous economic experiment, one whose eccentricity contrasts strongly with the consensus amongst economists that in order to control inflation interest rates must go up. Energy crisis
The other hot topic of the moment is the way energy prices have been going up. Crude oil prices rose more than 56% in 2021, despite a wobble in November, when the Omicron variant was identified, and at the time of writing, less than 2 weeks into 2022, the cost of the barrel is already up by a further 8.2%. These rises occur amidst a combination of increasing demand, as economic activity returns to normal levels, and insufficient supply.
The insufficiencies on the supply side are the result of the disinvestment in infrastructure verified during the pandemic, with some countries unable to returns to past levels of production. There are also geopolitical tensions, between Russia and the West, with Moscow restricting exports of fossil fuels to Europe. One final factor is the unusual cohesion amongst the countries that form the OPEC cartel of oil producers; unlike in the past, when member states, keen to cash-in every time the price of the barrel went up, would sell more than their allocated quota. This time around, the discipline has been remarkable. This is bad news for those filling in at the gas station, with prices likely to continue to rise as demand increases with the return to normal levels of economic activity in the aftermath of the pandemic.
So, 2022 looks set to be a year unlike previous ones. We got used to cheap money, low inflation, and reasonable fuel prices; those days are over. Difficult to predict exactly how these changes will impact both Wall Street and main street, but the changes are likely to be significant. Budgeting will become harder for families, while in the markets, risk-related assets (think tech stocks, cryptos, etc) won’t be as rampant as over the past few years. To finish on a bright note, value stocks look set to return to the top of investors’ wish list, with banks and oil companies standing out as potential winners.
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