What happens next to oil prices can have vast implications on both the stock market and the economy.
I think we are at a very interesting juncture. One the one hand, there does seem to be the very real possibility of an oil spike given geopolitical risks. Back-to-back strikes between Israel and Iran could result in energy disruption.
The Middle East, with its vast oil reserves, is no stranger to conflicts that impact global oil supply and prices. The current tension between Israel and Iran is a continuation of a historical rivalry, with both nations wielding considerable influence in the region. The mere possibility of military escalation between these two powers is enough to send ripples of concern through the markets. Should the situation further deteriorate, the consequences for global oil supply could be immediate and severe. That’s your argument for higher oil prices.
On the other hand, oil prices could reverse to the downside. There are a few catalysts that could trigger this. The first of course would be de-escalation in the Middle East, calming down the war premium in energy prices. The other is a global economic slowdown.
With market participants bracing for the possibility of no interest rate cuts in 2024, and maybe even a rate hike, it seems plausible that we could see a big deceleration in global growth. Housing starts may be sensing that. With mortgage rates back on the rise, housing started collapsed the most since April 2020, down 14.7%. If this isn’t an aberration, it would suggest a slowdown in housing, which in turn has big implications on U.S. economic activity.
The Bottom Line on Oil Prices Now
So, which direction are oil prices more likely to head? It’s very much unclear in my view.
I don’t think anyone is anticipating an economic slowdown, even though there are signs of one happening. And if stocks go through a meaningful correction, then investors should expect oil prices to head lower in sympathy.
Either way, what happens next will matter a lot and could determine bonds yields’ next move given how closely tied oil is to inflation expectations.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
