Rising Oil Prices: Another Worry For Investors

The stock market in the United States, already restless due to a hawkish Federal Reserve and a confrontation between Russia and Ukraine, now faces a new threat: rising oil costs.

Rising Crude oil prices

Crude oil prices in the United States are currently hovering around $91 per barrel, having risen by 40% since December 1 and reaching their highest level since 2014. Brent crude prices, the worldwide benchmark, have also risen to near seven-year highs.

Also Read: What is Oil Trading – Guide

Constantly increasing oil prices can be a source of concern for markets, since they suffocate the economy by raising expenses for businesses and consumers. Higher crude threatens to accelerate already-rising inflation, adding to concerns that the Fed may need to tighten monetary policy forcefully to keep consumer prices in check.

According to Peter Cardillo, chief market economist at Spartan Capital Securities, the stock market would be in serious difficulty if oil prices rose beyond $125 per barrel and stayed there for an extended period of time since high levels of inflation would be overheated. That means the Fed would have to be much more active, which would not be good for the stock market.

Rising relations between Russia, one of the world’s top oil producers, and Ukraine recently aided the oil rise, which had been bolstered by a rebound in demand following the coronavirus pandemic.

Crude oil and natural gas prices are expected to rise if the situation in Ukraine escalates, according to Capital Economics experts, even if they come back reasonably fast once the dust settles.

Inflation in the United States climbed at its quickest rate in nearly four decades last month, thanks to rising oil costs: while total consumer prices increased 7.5 percent year over year in January, the index’s energy component increased 27 percent.

According to analysts, each year-over-year growth of $10 in the cost of oil per barrel contributes roughly 0.3 percentage points to the entire consumer price index.

The S&P 500 index has lost more than 8% this year, while the yield on the benchmark 10-year Treasury note has increased by 40 basis points to over 1.9 percent. Now investors expect the Fed funds rate to rise to above 1.50 percent by the end of 2022, up from around zero presently.

Effect of Consumer Expenditure

The cost of oil is already increasing for businesses and drivers. According to AAA, the national average cost of fuel in the United States recently was at $3.48 per gallon, up 18 cents from a month ago and 98 cents from a year ago.

Investors are assessing the impact of increasing oil prices on company profits. According to David Bianco, Americas chief investment officer at DWS Group, soaring oil prices generally boost total S&P 500 profits by about $1 for each share for every $5 increment in crude prices, with gains to energy companies outweighing the drag on profits of airline companies and other companies potentially affect by higher crude costs. This equates to around 0.4 percent of overall S&P 500 earnings in 2022.

The S&P 500 energy sector is up 22% so far in 2022, with fund managers reporting their largest exposure to energy equities since March 2012 in the latest BofA Global Research survey.

However, with oil prices reaching seven-year highs and energy companies accounting for a far smaller percentage of the market than they did a decade ago, some investors believe that any short-term profits will be eclipsed by inflation concerns if crude prices continue to rise.

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