Oil prices have been marching higher for months, a fact that many readers likely know based on recent trips to the pump. The cost of a barrel of West Texas Intermediate oil has soared from the low teens in April 2020 to over $90 a barrel today, as surging demand continues to be met with constrained supply. Many economic forecasters and energy analysts are calling for $100 per barrel and soon.1
If oil prices continue to move higher, costs for businesses and consumers will continue to go up as well, which could sap margins and spending, respectively. This begs the question: will high oil and gas prices crush this bull market?
I think the answer is no. The first reason I’ll give is based purely on history, and the second reason is based on a supply and demand imbalance I think should correct later this year.
If the Bull Market Dies, Are Your Investments Prepared?
With concerns that rising oil prices could kill the economic expansion and bull market, many investors are wondering if their investments are prepared for what’s to come. This can lead investors to make drastic moves and fall prey to mistakes like trying to time the market.
To help you protect your investments and make decisions based on fundamentals and data, I am offering all readers a first look into our just-released March 2022 Stock Market Outlook report2. This report will provide you with our forecasts along with additional factors to consider:
- Zacks rank S&P 500 sector picks
- Zacks view on equity markets
- What produces optimism in 2022?
- Zacks forecasts for 2022
- Zacks ranks industry tables
- Sell-side and buy-side consensus
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
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Let’s start with the history. Many readers may not remember, but there was a period from mid-2011 to 2014 when oil prices hovered around $100 a barrel pretty consistently (circled in red on the chart below). Gas prices were quite high then, too, even higher than they are in parts of the country today.
The stock market did not seem to mind – during the period from 2011 to 2014 when a barrel of oil cost more than $100, the S&P 500 went up +65.1%.3 The U.S. economy grew throughout that period as well, albeit at modest rates. Modest GDP growth was more due to the economic ‘hangover’ from the Global Financial Crisis than high oil prices, in my view.
The first chart below shows the period when oil was above $100 a barrel, and the second chart shows the S&P 500 from 2012 onward. As you can see, higher oil prices may not have necessarily helped the economy and markets, but they certainly did not hurt.
The second reason I do not think higher oil prices will kill the economic expansion and/or bull market is because of supply forces.
The period of high oil prices from 2011 to 2014 gave way to a shale boom in the U.S., which, coupled with OPEC also increasing supply, caused oil prices to plummet (readers can see the drop-off in prices around 2015). The well-remembered U.S. shale boom was heavily financed with debt, which ultimately led to a wave of bankruptcies and failed companies when oil prices crashed. Some analysts believe the lessons learned in that period will result in broad reluctance for shale producers to take advantage of high oil prices this time around, meaning supply will remain constrained in 2022. But the data so far suggests otherwise.
In the U.S. Permian basin, shale exploration and development rig activity are back to about 70% of pre-pandemic levels, and oil production is close to crossing all-time highs above 5 million barrels per day. In the gas-rich Haynesville close to the U.S. Gulf Coast, activity is just about at its highest level in a decade. U.S. oil production in February is expected to rise to 8.54 million barrels per day, which is only 730,000 barrels less than the record set in November 2019. Back then, oil prices were $20 lower than they are today.
At the end of the day, U.S. shale producers are very wary of taking on big debt and overproducing as they have in the past. But they are not wary of ramping up production to take advantage of higher prices. As of late last year, the break-even cost for shale producers was $37 per barrel. With oil trading above $90 per barrel, the incentive to come back online is high.
The other side of the supply equation is, of course, OPEC. The organization has indicated on a few occasions its intention to increase production and most recently announced a 400,000 barrel-per-day increase in March. But figures from OPEC are not always reliable, and to date, OPEC production remains about 5 million barrels per day below peak levels. Market-watchers are understandably worried about the impact of a Russian invasion of Ukraine, given Russia’s status as a significant oil and commodities producer, particularly for Europe. This possibility remains a wildcard, and could give way to more choppiness and even higher prices in the near term – an outcome I think would simply shift supply elsewhere, and bring even more producers online.
Bottom Line for Investors
Higher oil prices are not ideal for energy-intensive businesses or consumers, but they are also not a death knell for earnings or an economic expansion. The U.S. economy was notably weaker in the 2011 to 2014 period than it is today, in my view, and the economy and markets managed to do just fine during that period of $100+ oil.
It may not happen immediately but eventually sustained higher prices will encourage more production, particularly from U.S. shale companies. We are starting to see signs of that now. As production ramps up and more supply comes online, price pressures will eventually ease, in my view. I do not necessarily see this as a multi-year process as we saw in the previous cycle – U.S. shale companies can bring production online relatively quickly and efficiently, and with oil close to $100 per barrel, I believe they will.
If you are uncertain about what to do with your investments during a time like this, I recommend that investors focus on factors that can protect their investments for the long term. To help, I am offering all readers our Just-Released March 2022 Stock Market Outlook Report6.
You’ll discover Zacks’ view on:
- Zacks rank S&P 500 sector picks
- Zacks view on equity markets
- What produces optimism in 2022?
- Zacks forecasts for 2022
- Zacks ranks industry tables
- Sell-side and buy-side consensus
- And much more
If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today!
Disclosure
2 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
3 Fishers Investments. February 2, 2022. https://www.fisherinvestments.com/en-us/marketminder/our-perspective-on-those-100-oil-forecasts
4 Fred Economic Data. February 9, 2022. https://fred.stlouisfed.org/series/DCOILWTICO
5 Fred Economic Data. February 15, 2022. https://fred.stlouisfed.org/series/SP500#0
6 Zacks Investment Management reserves the right to amend the terms or rescind the free Stock Market Outlook offer at any time and for any reason at its discretion.
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