Investors are paying attention. After all, it was the surge in energy prices two years ago that helped drive inflation and interest rates to a scale not seen in decades.
The International Monetary Fund on Tuesday described an “adverse scenario” in which an escalation of conflict in the Middle East would lead to a 15% rise in oil prices and higher transport costs that would cause global inflation to rise by 15%. about 0.7 percentage points.
Tighter oil supplies and rising prices have been supported by production cuts from oil group OPEC and other major oil producers.
Morgan Stanley raised its forecast for third-quarter Brent crude oil by $4 a barrel, to $94. With oil prices expected to remain high, we examine the implications for global markets.
1/ WATCHING INFLATION
After U.S. inflation was higher than expected for the third straight month in March, the specter of remaining high inflation returned with bets on a sharply reduced interest rate cut. Falling energy prices have recently been one of the main drivers of lower inflation expectations. Rising oil prices are seen as a threat to this trend. The euro zone’s key market gauge of long-term inflation expectations, which typically tracks oil, rose to its highest level since December at 2.39% on Tuesday. The European Central Bank has an inflation target of 2%.
ECB chief Christine Lagarde said on Tuesday that new turmoil in the Middle East was having little impact on commodity prices so far. Oil, while near recent highs, has slowed slightly this week.
The ECB nevertheless said it was “very attentive” to the impact of oil, which can harm economic growth and stimulate inflation.
Guy Miller, chief market strategist at Zurich Insurance Group, said economies can survive and producers are reasonably happy when oil is between $75 and $95 a barrel.
“But if we saw that trend going up, yes, that would be a concern from both a growth and inflation perspective,” he said.
2/ GO TO ENERGY STORES
Energy stocks are clear winners from the rise in oil prices. The S&P 500 oil index and European oil and gas stocks remain near their record highs.
U.S. oil stocks have surged nearly 13% year to date, outperforming the broader S&P 500’s 6% gain.
Ed Yardeni, founder of Yardeni Research, said a rise in Brent crude to $100 in the coming weeks was a possibility, recommending an “overweight” position on energy stocks.
Oil last topped $100 in 2022. It briefly hit around $139 after Russia’s invasion of Ukraine, its highest level since 2008.
“I think you need to overweight energy as at least a shock absorber in your portfolio in case oil prices continue to rise,” Yardeni said.
Emmanuel Cau, head of European equity strategy at Barclays, has been overweight European energy stocks since October, saying the sector tends to perform well in inflationary and stagflationary environments.
On the other hand, Kasper Elmgreen, CIO of Nordea, said he was negative on energy stocks because the costs associated with an energy transition were not yet correctly assessed.
“They (energy companies) are going to have to take a much bigger burden to get to net zero, and that’s not reflected in the stock price,” Elmgreen said.
3/ ROBUST DOLLAR
2024 began with expectations that the dollar would fall as inflation weakens and would allow the Federal Reserve to begin cutting rates.
Instead, the greenback is up 4.7% this year as bets on a rate cut have been reduced.
Rising oil prices could fuel dollar strength.
Bank of America said that although the dollar remained negative in the medium term, high oil prices meant the US currency presented “upside risks”.
That exacerbates pressure on economies such as Japan, which is struggling with currency weakness, keeping traders nervous about possible intervention to prop up a yen that is languishing at a 34-year low.
“The yen and euro will see their terms of trade deteriorate as energy prices rise. This implies that they will be weaker if energy prices rise,” said Colin Asher, senior economist at Mizuho Corporate Bank.
4/ FRESH EM PAIN
Higher oil prices over a long period of time also risk harming many emerging market economies, such as India and Turkey, which are net oil importers.
The Indian rupee hit a record low against the dollar this week.
Because the price of oil is expressed in dollars, many importers are also exposed to higher prices caused by currency fluctuations.
Even in Nigeria, which is typically Africa’s largest oil exporter, the falling naira has hit government coffers due to capped gasoline prices at the pump and a lack of local oil refining.
