{"id":9744,"date":"2024-04-15T14:22:59","date_gmt":"2024-04-15T14:22:59","guid":{"rendered":"https:\/\/zacksim.com\/financial-professionals-insights\/?p=9744"},"modified":"2024-04-15T14:22:59","modified_gmt":"2024-04-15T14:22:59","slug":"oil-prices-are-rising-fast-should-investors-be-worried","status":"publish","type":"post","link":"https:\/\/zacksim.com\/financial-professionals-insights\/oil-prices-are-rising-fast-should-investors-be-worried\/","title":{"rendered":"Oil Prices Are Rising Fast\u2014Should Investors Be Worried?"},"content":{"rendered":"\n

Should Investors Be Concerned About Rapidly Rising Oil Prices?<\/strong><\/p>\n\n\n\n

Oil prices have been on the move\u2014but not in the direction that favors consumers.<\/p>\n\n\n\n

In the first quarter of 2024, the price of a barrel of West Texas Intermediate crude has risen almost 15%, and Brent crude futures \u2013 the global benchmark \u2013 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<\/sup><\/p>\n\n\n\n

Oil Prices Made a Sizable Move in Q1 2024<\/em><\/strong><\/p>\n\n\n\n

\"\"
Source: Federal Reserve Bank of St. Louis2<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

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\u2019t seen major disruptions to date.<\/p>\n\n\n\n

The more meaningful hit to supply is actually coming from the U.S. The United States is the world\u2019s 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\u2014and 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.<\/p>\n\n\n\n

On the demand side, a large swath of the global economy looks like it\u2019s flipping back into growth mode, which of course puts upward pressure on crude oil and other raw materials. Other factors \u2013 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 \u2013 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.<\/p>\n\n\n\n

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\u2019s 10.6% gain.<\/p>\n\n\n\n

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

Not necessarily. As I\u2019ve 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\u2019ve 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 \u2013 albeit modestly \u2013 and stocks remained locked in a bull market.<\/p>\n\n\n\n

The U.S. economy can withstand higher oil prices<\/em><\/strong><\/p>\n\n\n\n

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Source: Federal Reserve Bank of St. Louis3<\/sup><\/em><\/strong><\/figcaption><\/figure>\n\n\n\n

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\u2019d see major producers ramp up to take advantage of higher margins. Such an outcome is consistent with what we\u2019ve seen historically, and new technology allows producers to increase output fairly quickly.<\/p>\n\n\n\n

Bottom Line for Investors<\/strong><\/p>\n\n\n\n

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\u2019s policy loosening plans, and ultimately disappoint markets.<\/p>\n\n\n\n

These are all real possibilities, in my view, and I think it\u2019s possible we see volatility this summer if uncertainty persists\u2014especially 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.<\/p>\n","protected":false},"excerpt":{"rendered":"

Higher oil prices are not with risks, and this week Mitch takes a look at whether the U.S. economy can withstand rising prices. <\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[181,1],"tags":[],"class_list":["post-9744","post","type-post","status-publish","format-standard","hentry","category-financial-professionals","category-mitch-on-the-markets"],"acf":[],"_links":{"self":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9744","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/comments?post=9744"}],"version-history":[{"count":2,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9744\/revisions"}],"predecessor-version":[{"id":9748,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/posts\/9744\/revisions\/9748"}],"wp:attachment":[{"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/media?parent=9744"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/categories?post=9744"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/zacksim.com\/financial-professionals-insights\/wp-json\/wp\/v2\/tags?post=9744"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}