Weekly Buzz: Major oil producers are tightening the tap

15 September 2023

In a bid to prop up oil prices, Saudi Arabia and Russia are keeping their taps turned down. They’ve just extended their production cuts until December, which means they’ll be pumping out less oil than they could for the rest of the year. This supply cut could be set to impact the global economy at large.

The effects of higher oil prices

Investors had already been bracing for a bit of a squeeze in supply, especially with some key countries producing less oil and Saudi Arabia making extra cuts back in July. But this extended supply cut means the pinch might be even tighter than expected. As a result, Brent crude oil, a global price benchmark, has topped the $90 mark for the first time this year.

When oil prices rise, so does the cost of gasoline. And since gasoline is the main source of fuel for transportation and logistics, higher oil prices will translate to higher prices for goods and services overall. Falling energy prices have helped cool inflation for most of the year, but with this rebound in crude oil prices, there might be something of an oil slick up ahead.

As an investor, what does this mean for me?

If higher oil prices are set to add to inflation woes for global economies, this raises the prospect of further tightening (read: higher interest rates) from central banks. Borrowing costs would become even more expensive, putting a damper on economic growth.

But it’s not all doom and gloom, the global economy has shown resilience so far. And there’s solid evidence that other components of inflation are cooling down. Cash supply in the Eurozone dipping below negative growth levels, and the slowdown in the US jobs market are a few signs that inflation might be losing its grip on these major economies.

💡 Investors’ Corner: Big Tech’s pushing out smaller firms

Even if you wanted to, it’s difficult to ignore US tech stocks. The “Magnificent Seven” – Apple, Microsoft, Alphabet, Amazon, Nvidia, Tesla, and Meta – now hold more weight in the MSCI ACWI index than France, China, Japan, and the UK combined. This index tracks the global stock market, and is market capitalisation-weighted; we’ll break down what that means in our Jargon Buster below.

So if you have any exchange-traded funds (ETFs) that track the global market, you likely have a lot more of your eggs in the tech basket than you thought.

With big firms dominating indices, smaller companies are being pushed to the side. Today’s stock market is less diversified than it would be if smaller firms carried more sway, and your index may now be representing a less diverse portion of the corporate universe. With Big Tech only getting bigger, that won’t change anytime soon.

To counter this, you could take the effort to better understand the composition of the ETFs you’re investing in. If you’re not happy with the risk of a higher concentration, you could focus on other regions or specific sectors. Our Flexible portfolios were designed with this purpose in mind, allowing you to easily customise your portfolio’s exposures.

This article was written in collaboration with Finimize.

🎓 Jargon Buster: Market capitalisation-weighted index

A market capitalisation-weighted index is simply a way of creating a portfolio of companies based on their market value. Bigger companies are given more influence, or weighting.

So if a behemoth like Apple has a good day in the stock market, the whole index might move upwards, even if many smaller companies aren't doing as well. It's the difference between having a heavyweight wrestler and a lightweight boxer in a tug-of-war; the heavyweight is probably going to have more pull.

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