Why Oil Prices Suddenly Matter Again

One of the biggest drivers of global inflation right now isn’t wages or government spending.

It’s oil.

In early March, oil prices experienced one of the most volatile trading periods since the COVID crisis. At one point, Brent crude surged nearly 30% intraday to almost $120 per barrel before dropping back below $90 shortly after political commentary suggested the conflict might be easing.

The cause of the sudden volatility is geopolitical tension affecting the Strait of Hormuz, a critical shipping route through which roughly 20% of the world’s oil supply passes.

Several merchant ships have already been attacked in the region, and analysts now believe disruption to oil flows could last longer than initially expected.

For now, oil has settled around $100 per barrel, but markets remain extremely sensitive to any new developments.

 

Why This Matters for Inflation

When oil prices rise sharply, the impact spreads throughout the entire economy.

Energy costs influence:

– Petrol and transport costs
– Manufacturing and shipping
– Food production
– Electricity prices

This is why central banks watch oil prices closely.

If oil remains elevated, it could push inflation higher again, just as central banks were starting to believe price pressures were easing.

 

What This Means for Interest Rates

Higher oil prices may also mean interest rates stay higher for longer.

Recent commentary from the Reserve Bank suggests policymakers are already concerned about inflation risks. Strong employment data, solid economic growth, and rising energy costs are all contributing to that concern.

Markets are currently pricing around a 70% chance of another rate rise at the next meeting.

Historically, interest-rate tightening cycles in Australia have often involved multiple increases over time, so it’s possible the market may be underestimating how long rates remain elevated.

 

What Investors Should Know

Rising inflation and higher interest rates can be challenging for markets because they tend to reduce company valuations and increase borrowing costs.

However, not all businesses are affected in the same way.

Some sectors can actually benefit from higher interest rates, including:

– Energy producers: Companies that produce oil and gas can benefit directly from higher energy prices.

– Banks: Higher interest rates can increase bank profitability through wider lending margins (although slower borrowing growth can offset this).

– Insurance companies: Insurers often hold large pools of investment capital. When interest rates rise, the income generated from these investments increases.

 

The Importance of Diversification

Investor Ray Dalio once described the “Holy Grail of Investing” as building a portfolio with many different sources of return that don’t move together.

This becomes especially important in environments where inflation and interest rates remain elevated.

In those environments, many of the assets investors typically hold — such as shares and bonds — can move in the same direction at the same time, increasing volatility.

A diversified portfolio helps reduce that risk.

 

The Big Picture

While short-term market movements can be unpredictable, oil prices are an important signal to watch.

If energy prices remain elevated, it could mean:

– Inflation takes longer to fall
– Interest rates remain higher for longer
– Markets experience more volatility

These are all factors investors should be aware of as we move further into 2026.