Oil’s Brief Surge Above $100 Exposes Inflation Risk for Stocks

p6j6pqqumy85p038yoo72lpl_media_dl_1.png Bloomberg

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(Bloomberg) — Last week, Morgan Stanley said oil would need to remain over $100 a barrel to dislodge the bank’s bullish outlook for US stocks. Evercore ISI said crude priced between $93 and $97 would signal that equities are headed for a drop.

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Oil had surged past those levels for less than 24 hours on Monday, but that was long enough to raise concerns on Wall Street and, seemingly, in Washington. Late into the trading session, President Donald Trump spoke.

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The US war with Iran, he told CBS, was “very complete.” Stocks — down as much as 1.5% that day — turned positive, and oil prices quickly fell back down to their trading range from Friday, even as the US leader also said he was “thinking about” taking over the Strait of Hormuz. Crude is hovering around the same level Tuesday morning, with US stock futures trading down 0.3%.

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But while oil prices pulled back from near $120 a barrel, the risk of them returning to triple-digit levels remains.   That’s forcing strategists to game out how long elevated prices would last, and how much damage they could do to the S&P 500 Index.

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“The problem is the total uncertainty,” said Sam Stovall chief investment strategist at CFRA. 

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The Iran war is adding energy-related inflation to an already long list of traders’ worries, including the potential of artificial intelligence to disrupt multiple industries and cracks in the private credit market. A spike in oil prices threatens the spending power of US consumers, as well as fuel-guzzling industries such as airlines and cruise operators.

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Reports of an oil tanker explosion near Abu Dhabi cast doubt on speculation that the war in Iran could be over anytime soon. Tanker traffic in the Strait of Hormuz remains near zero.

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If oil prices stay high, “the Fed really can’t ease as much as probably they’d like to, and it likely means it’s going to be harder to back down the inflation ramifications,” Matt Miskin, co-chief investment strategist at Manulife John Hancock Investments, said in an interview.

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Meanwhile, Deutsche Bank AG said that one of three conditions has to be met for an oil price shock to push the S&P 500 down at least 15%. The price of crude needs to rise by at least 50% and be sustained over several months, spur a hawkish central bank response or cause broader damage to the US economy.

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As for broad economic pain, such “price shocks aren’t as impactful as they once were for the US,” Jim Reid, global head of macro research and thematic strategy at Deutsche Bank, wrote in a recent note to clients, since the country has emerged as a major oil producer.

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