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Analysts have highlighted the risk of a shock in the price of oil as geopolitical tensions escalate.
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Oil prices rose 10% in the last week amid tensions between the United States and Venezuela and unrest in Iran.
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Higher oil prices could fuel inflation and lead stocks and bonds to sell off, one economist said.
Rising oil prices. Hot inflation. Turmoil in the markets.
That was a dire mix for the US economy in the 1970s, but analysts say the risks of another oil price shock — a situation where oil prices rise suddenly and trigger a domino effect of negative consequences in markets and the economy — are increasing as the geopolitical conflict escalates.
Oil prices have risen in recent weeks as the United States carried out its raid on Venezuela and threatened military action in Iran — two of the world’s largest crude oil producers.
March contracts for Brent crude, the international benchmark, rose 10% in the past week, jumping 3% to trade above $65 a barrel on Tuesday. It is the highest price for Brent since November.
If Brent oil reaches $80 per barrel, this will probably constitute a shock in the price of oil, according to José Torres, senior economist at Interactive Brokers.
In that scenario, Torres said he believes bonds and stocks would sell off together, as higher energy prices could fuel inflation, which could weigh on economic growth. Higher inflation could also mean the Fed has less room to cut interest rates down, a key catalyst that has pushed riskier assets higher in the past year.
“There’s definitely a risk for an oil price shock, especially with stocks going up for three really robust years,” Torres told Business Insider, referring to back-to-back years of double-digit gains for the S&P 500.
Matt Gertken, chief geopolitical strategist at BCA Research, said the recent tensions in Iran have increased the odds of a “massive global oil supply shock” to around 40%. If Iran’s regime falls and conflict in the region escalates, it could result in “significant losses” in oil production across the region, he wrote in a note to clients this week.
“Global and US equities are exposed to a near-term correction due to currently overvalued and overbought conditions and growing geopolitical risk,” Gertken added.
Deutsche Bank analysts have also indicated the risk that the market will experience an oil shock this year.
“A positive supply shock to oil prices would have a material impact on inflation expectations and inflation risks,” the bank wrote in a recent client note, calling the scenario a key risk to their economic outlook.