Return to pre-war oil prices ‘unlikely’

Oil prices are unlikely to return to pre-war levels in the short to medium term, a shift that could keep inflation elevated, delay interest-rate cuts, and reshape global investment returns, according to Nigel Green, chief executive of the deVere Group.

Oil prices rose on Monday after Israel ordered troops to push deeper into Lebanon, renewing concerns that clashes with Hezbollah could threaten a fragile ceasefire between Washington and Tehran.

Brent crude traded around US$93 a barrel before the latest escalation and has previously surged above US$112 as traders priced in risk of disruption.

Although prices have eased from peak levels, Green warns markets are underestimating geopolitical impact.

Around 20% of global oil consumption passes through Strait of Hormuz, a key energy artery.

“Many investors are assuming oil could quickly fall back toward pre-war levels when tensions ease,” says Green. “But we believe that assumption is becoming increasingly difficult to justify. Energy markets are pricing a new reality in which supply security carries a significant premium.”

The implications stretch beyond oil producers; global demand remains close to record highs at more than 103 million barrels per day, while spare production capacity remains limited relative to historical averages.

A tighter supply-demand balance means relatively small disruptions can have an outsized impact on prices.

Higher oil prices also feed directly into inflation. Economists estimate that every sustained US$10 increase in crude prices can add between 0.2 and 0.4 percentage points to inflation in advanced economies.

Fuel costs affect transportation, manufacturing, logistics, food production and consumer goods, making oil one of the most influential inputs across the global economy.

“This raises the prospect for investors that central banks may be slower to cut interest rates than markets anticipate. Higher-for-longer borrowing costs would have implications for government bonds, growth stocks and other assets that benefit from lower rates.”

Energy equities the clearest beneficiaries of a prolonged period of elevated crude prices.

“History teaches us that energy stocks have outperformed broader equity markets during major oil rallies as higher commodity prices boost revenues, margins and cash generation,” Green concluded.