Could Surging Oil Prices Impact Stock Market’s Record Run?
- Oil prices surged over 10% in the past week amid escalating Middle East tensions.
- Despite rising oil prices, the stock market continues its strong performance, with the Dow Jones closing at a record high last week.
- Analysts believe the global growth outlook remains steady, keeping inflationary concerns at bay.
Oil prices have surged more than 10% over the past week, driven by heightened conflict in the Middle East. Investors are concerned that the situation could disrupt the global oil supply, particularly if the conflict widens.
Despite this, stock investors have shrugged off the risk, as the global economic outlook remains stable and oil prices are still below inflationary levels seen in the wake of Russia’s invasion of Ukraine. According to Goldman Sachs, even if the market loses a significant portion of Iranian oil, prices would still not reach the levels that previously triggered inflation.
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Rising Oil Prices Amid Geopolitical Tensions
On Monday, oil prices continued to climb as the war between Israel and Hamas threatens to expand into a broader conflict. Brent crude futures rose by nearly 4% to $81 per barrel, marking the highest level since August. Reports suggest President Joe Biden is discouraging Israel from retaliating against Iran’s oil assets following a recent rocket attack.
While rising oil prices typically pose a threat to the stock market by straining consumer spending and increasing geopolitical risk, equities rallied last week. The Dow Jones hit a record closing high, and the S&P 500 neared its own record before slipping 1% on Monday.
Why Is the Market Resilient?
According to analysts from Deutsche Bank, the market’s resilience can be attributed to the fact that geopolitical risks have not drastically altered the global growth outlook. Despite the Middle East conflict, disruptions to oil flow and supply chains have been relatively minor, allowing major economies to maintain steady growth expectations.
Recent events, including a strong US jobs report and China’s economic stimulus, have helped improve the global economic outlook. While oil prices have risen sharply, the current price of $81 per barrel is still below the 2024 average, meaning inflation remains under control.
Bank of America analysts estimate that a 10% increase in oil prices adds less than 0.1% to core inflation. They suggest that oil prices would need to exceed $100 per barrel to have a meaningful impact on inflation. The last time prices reached those levels was in mid-2022, when sanctions limited Russian oil exports.
Inflation Expectations and Gas Prices
Inflation expectations are a key driver of actual inflation, with gas prices playing a crucial role. However, Bank of America predicts that gas prices would need to nearly double to significantly affect US consumers’ inflation expectations, which have improved for four consecutive months.
Where Are Oil Prices Headed?
Goldman Sachs analysts believe major disruptions to global oil supply are unlikely. They forecast that oil prices will range between $70 and $85 per barrel in the fourth quarter, averaging $77 per barrel. While disruptions to Iranian oil could push prices higher, Goldman expects prices would peak in the mid-$90s, even without OPEC increasing production to offset the shortage.
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