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Oil Prices, Inflation, and Influencing Geopolitical Factors

May 24, 2024

Investing is a long-term game. There are highs and lows that come with any long term strategy. What do you need to watch out for when it comes to your long term strategy? We all know that diversifying your investment portfolio can play a crucial role in its longevity throughout market turmoil. After all, the more eggs you have in your basket, the more equipped you are to deal with changing circumstances. It’s important to focus your strategy on the long term as opposed to a fluctuating day to day or month to month strategy to accommodate for any shifts. Let’s take a look at oil prices, inflation, and the geopolitical factors that disrupt them, as an example.


Oil Prices

       When we take a look at investing in oil we not only look at the prices, but the supply chain as well. One factor to consider includes the highs and lows that come with long-term investments. Take into consideration how the price of oil impact aspects like inflation. Taking into account a potential issue with geopolitical instability, like a disruption in oil production, or simply imports and exports, can impact supply. A lack of supply, understandably leads to higher prices, in this case for oil. Rising oil prices lead to higher inflation and interest rates. Simply put, lack of supply increases inflation.


Let’s take a look back at 2022 when increasing oil prices lead to a spike to $5 on average at the pump. Oil prices have sense leveled out. Still, it’s important to remember not only how market fluctuations impact our day to day, but also how they play a crucial role in our long term strategy.


The United States is now the largest producer in the world of oil and gas. Domestic oil production has now come full circle from the pandemic and currently exceeds 13 million barrels per day. While the United States is the largest producer, we are still dependent on imports of oil from other countries. The largest sources of imports for U.S. oil include Canada, Mexico, and Saudi Arabia in recent years. However, price swings still impact U.S. producers and consumers despite strong U.S. oil production and strong trading partners.


As geopolitical factors fluctuate, so will the prices of oil. This can impact inflation and interest rates in a domino effect. Finally, from an investment perspective, the energy sector is a volatile but important component of a diversified portfolio. Interestingly, the sector has behaved quite differently from the rest of the market over the past several years. For example, during the 2022 bear market caused by inflation and recession fears, rising oil prices propelled the energy sector to a total return of 65.7%, adding to its significant gain in 2021. This was also a reversal of the trend that began in 2014 when the energy sector was among the worst performers most years due to overproduction and low oil prices. This year, the energy sector has generated a total return of 14.5% and is now the best performing sector. While there is no guarantee that the energy sector will always perform well during periods of geopolitical uncertainty, it remains an important part of a balanced portfolio that can help investors to weather volatility and stay focused on long-term financial goals.

The bottom line? 

Geopolitical instability can drive up oil prices and spur inflation, muddying the economic and interest rate outlook. Investors should continue to stay invested and focused on long run trends.



Information is provided by EBW and written by James Liu/Clearnomics, a non-affiliate of Cetera Advisor Networks LLC. The views stated in this piece are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities. Due to volatility within the markets, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. A diversified portfolio does not assure a profit or protect against loss in a declining market.”. | Please add the Commodities disclosure: “Cetera does not offer direct investments in commodities (such as oil).