Mitch on the Markets

April 15th, 2024

Oil Prices Are Rising Fast—Should Investors Be Worried?

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Should Investors Be Concerned About Rapidly Rising Oil Prices?

Oil prices have been on the move—but not in the direction that favors consumers.

In the first quarter of 2024, the price of a barrel of West Texas Intermediate crude has risen almost 15%, and Brent crude futures – the global benchmark – are up 18%. That puts the global price of a barrel of oil above $90 as I write, which has already fed into higher gas prices. According to AAA, gas prices are also up 15% this year, with the national average at $3.57 a gallon.1

Oil Prices Made a Sizable Move in Q1 2024

Source: Federal Reserve Bank of St. Louis2

There are a few forces driving up prices. On the supply side, the two ongoing wars have caused disruptions. Ukrainian attacks on Russian oil-refining facilities have dented diesel exports, which has prompted refiners elsewhere to increase output (requiring cruder). Traders also fear that escalations in the Middle East could impact production, though we haven’t seen major disruptions to date.

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Rising oil and commodity prices could drive short-term volatility in the markets, in what already could be a volatile year given the upcoming election. Investors should have a clear sense of where the opportunities are if or when that happens.

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The more meaningful hit to supply is actually coming from the U.S. The United States is the world’s largest oil producer, and it looks like output could weaken from here. When oil prices went up last year, producers tapped drilled-but-uncompleted wells, which sent production to all-time highs—and also put downward pressure on prices. Lower prices and still-high interest rates have discouraged new investment, which is evident in steeply declining oil rig counts.

On the demand side, a large swath of the global economy looks like it’s flipping back into growth mode, which of course puts upward pressure on crude oil and other raw materials. Other factors – like rising demand for jet fuel from robust travel activity, and cargo ship disruptions in the Red Sea that are requiring more fuel to sail around the southern tip of Africa – are adding to the demand equation. All told, the International Energy Agency estimates 103 million barrels per day of global oil consumption, which would be a record.

In the near term, I would not be surprised if falling U.S. output and rising global demand place even more upward pressure on crude oil prices. This may also be a reason that the Energy sector outperformed in the first quarter, rising 13.7% in the first three months compared to the S&P 500’s 10.6% gain.

So, should investors be concerned if oil prices keep going up in the coming months, perhaps even crossing $100 a barrel?

Not necessarily. As I’ve written before, there is not a historically tight correlation between higher oil prices and weak economic growth and/or an underperforming stock market. The chart below demonstrates this point. Pictured is the global price of Brent Crude and West Texas Intermediate oil going back to 2000. I’ve circled in green a period of about 4 years when oil prices hovered in the $100 a barrel range, which were also years when the economy grew consistently – albeit modestly – and stocks remained locked in a bull market.

The U.S. economy can withstand higher oil prices

Source: Federal Reserve Bank of St. Louis4

Oil production also is sensitive to price, not global volumes. If the price of a barrel of oil rises above $100 a barrel, I think we’d see major producers ramp up to take advantage of higher margins. Such an outcome is consistent with what we’ve seen historically, and new technology allows producers to increase output fairly quickly.

Bottom Line for Investors

Higher oil prices are not without risks. The U.S. economy is at a point in this cycle where inflation needs to remain steady or continue trending downward so that the interest rate outlook and expectations for rate cuts in 2024 remain intact. Since oil is used in the production of everything from plastics, fertilizers, and of course gasoline, higher crude prices can impact the cost of travel, food, and other goods and services that exist downstream. This could pinch consumer spending, delay the Fed’s policy loosening plans, and ultimately disappoint markets.

These are all real possibilities, in my view, and I think it’s possible we see volatility this summer if uncertainty persists—especially given the U.S. presidential election looming in the background. But as I mentioned before, the economy has proven many times over that it can withstand higher oil prices, and I would anticipate that a period of higher prices would only be temporary as it incentivizes more production. Markets will likely anticipate that outcome, too.

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Disclosure

1 Wall Street Journal. April 4, 2024. https://www.wsj.com/business/energy-oil/oil-is-hitting-its-highest-level-in-monthsjust-in-time-for-summer-driving-season-3370fbf7

2 Fred Economic Data. April 3, 2024. https://fred.stlouisfed.org/series/DCOILWTICO#

3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.

4 Fred Economic Data. April 4, 2024. https://fred.stlouisfed.org/series/DCOILBRENTEU#

5 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion.

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