Could Surging Oil Prices Derail the Stock Market’s Record Run?

Key Takeaways

• Oil prices have surged more than 10% in the last week amid escalating conflict in the Middle East that threatens to disrupt global oil supply.
• Stock investors have shrugged off the risks of soaring oil prices because the global growth outlook remains steady and prices remain too low to reignite inflation.
• Goldman Sachs analysts expect that even if the market lost a substantial amount of Iranian oil, prices still wouldn’t reach the inflationary levels they did in the wake of Russia’s invasion of Ukraine.

Oil prices continued rising on Monday as Israel’s war against Hamas appears as likely as ever to grow into a wider conflict that disrupts global oil supply. 

Brent crude futures contracts were up nearly 4% at $81 a barrel, their highest price since August, amid reports that President Joe Biden was discouraging Israel from attacking Iranian oil assets in retaliation for last week’s rocket barrage. 

Rising oil prices are often a headwind for the stock market, in part because they threaten to weigh on consumer spending and because they often go hand-in-hand with geopolitical tension.

Yet equities rallied to close higher last week even as tensions in the Middle East ramped up and sent oil prices soaring. The Dow finished the week at a record closing high, while the S&P 500 was near a record of its own before slipping 1% on Monday.

Why the Market Is Weathering Geopolitical Risk

One reason for the stock market’s resilience, Deutsche Bank analysts wrote in a note on Monday, is that today’s geopolitical risks haven’t changed the outlook for global growth.

The Middle East conflict’s disruptions to global oil flow and supply chains have been too small to drastically change the outlook in most major economies. Rather, events in the last few weeks—including Friday’s blowout jobs report and China’s recent stimulus measures—have improved the global growth outlook.

Oil prices have risen precipitously, but not enough to reignite inflation. Brent prices have increased 10% in the last 5 days, but at $81/barrel remained below the 2024 average.

According to Bank of America analysts, a 10% increase in oil prices adds less than a tenth of a percentage point to core inflation. They estimate oil would need to climb above $100/barrel for there to be a meaningful impact on inflation. Oil prices haven’t been that high since mid-2022 when markets were grappling with sanctions intended to stop the flow of oil out of Russia, one of the world’s largest producers.

Inflation expectations are a key driver of inflation, and gas prices play an outsized role in setting those expectations. However, BofA expects gas prices would need to nearly double to upend U.S. consumers’ inflation expectations, which improved for the fourth straight month in September.

Where Are Oil Prices Headed?

Oil analysts at Goldman Sachs wrote in a note on Friday that they don’t expect major disruptions to global oil supply. They estimate oil prices will range from $70 to $85 a barrel throughout the fourth quarter, and average $77 a barrel.

Major disruptions to Iranian supply would boost oil, Goldman says. Though the firm forecasts prices would peak in the mid $90s, even if the Organization of the Petroleum Exporting Countries (OPEC) didn’t increase production to offset the shortage.

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