Soaring oil prices add another worry to exhausted investors

U.S. crude prices sit around $91 a barrel after jumping some 40% since Dec. 1 and earlier this week hit their highest level since 2014. Prices for Brent crude, the global benchmark, also skyrocketed and are approaching 7-year highs.

Rapidly rising oil prices can be a worrying development for markets, as it darkens the economic outlook by increasing costs for businesses and consumers. Rising crude also threatens to accelerate already rising inflation, heightening fears that the Fed will need to tighten monetary policy aggressively to rein in consumer prices.

“The stock market would be in real trouble if we went above $125 a barrel and stayed there for a while because it would overheat the high levels of inflation,” said Peter Cardillo, chief economist at Spartan Capital Securities. . “That means the Fed would have to be a lot more aggressive and that certainly wouldn’t be a pleasant scenario for the stock market.”

Rising tensions between Russia – one of the world’s largest oil producers – and Ukraine recently helped fuel the oil rally, which had been buoyed by a recovery in demand following the coronavirus pandemic .

Capital Economics analysts said earlier this week that crude oil and natural gas prices would rise if the conflict in Ukraine escalates “even if they fall relatively quickly as the dust settles.”

High oil prices contributed to rising inflation in the United States, which rose at its fastest pace in nearly four decades last month: as headline consumer prices rose 7, 5% year-over-year in January, the energy component of the index rose 27%.

Every “sustained” $10 increase in the price of oil per barrel adds about 0.3 percentage points to the overall consumer price index, on an annual basis, according to analysts at Oxford Economics.

“The biggest impact of higher oil prices is on consumer price inflation and that adds further pressure for the Fed to be more aggressive,” said Kathy Bostjancic, chief financial economist at the United States. United at Oxford Economics, in comments emailed to Reuters.

The benchmark S&P 500 index is down more than 8% this year, while the yield on the benchmark 10-year Treasury rose 40 basis points to more than 1.9%. Investors expect the federal funds rate to top 1.50% by the end of 2022, from near zero now, according to Refinitiv’s Fedwatch tool.

IMPACT ON CONSUMER SPENDING

Rising crude oil is already increasing costs for businesses and drivers. The U.S. national average for gasoline recently stood at $3.48 a gallon, the AAA auto group said earlier this week, up 18 cents from the previous month and 98 cents from a year ago. one year old.

As gasoline prices rise, investors are watching trends among consumers, whose spending accounts for more than two-thirds of U.S. economic activity. Data on Wednesday showed U.S. retail sales rose the most in 10 months in January, but last week’s consumer sentiment reading hit its lowest level in more than a decade early February.

“The risk is that if gas prices at the pump start to rise, it means less discretionary spending for consumers at a time when much of their tax advantages of the past two years are fading,” he said. Michael Arone, chief investment strategist at State Street. Global Advisors.

Investors measure the effect of rising oil prices on corporate earnings. Typically, rising oil prices should boost overall S&P 500 earnings by about $1 a share for every $5 increase in the price of crude, according to David Bianco, chief investment officer for the Americas at DWS Group, the benefits to energy companies outweighing the drag. earnings of airlines and other companies potentially impacted by rising crude prices. This represents about 0.4% of total S&P 500 earnings expected for 2022.

The S&P 500 energy sector is up 22% so far in 2022, while fund managers in the latest BofA Global Research survey reported their highest allocation to energy stocks since March 2012.

But with oil prices already near seven-year highs and energy stocks accounting for much lower market share than a decade ago, these slim earnings benefits could be overshadowed by concerns over the economy. inflation if crude oil continues to rise, some investors said.

“Higher oil prices, without a recession, boost S&P earnings,” Bianco said. “But not as much as before and you certainly don’t want that to happen when the Fed is fighting inflation.”

(Reporting by Lewis Krauskopf; Additional reporting by Lucia Mutikani and Scott DiSavino; Editing by Ira Iosebashvili and Aurora Ellis)

By Lewis Krauskopf


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Felix J. Dixon