The US economy faces increasing risks of an oil price shock, a situation where oil prices surge and trigger negative consequences in markets and the economy, as geopolitical conflicts intensify. This scenario draws comparisons to the 1970s.
Oil prices have risen in recent weeks following a US raid in Venezuela and threats of military action in Iran, both major crude producers. March contracts for Brent crude, the international benchmark, increased by 10% in the last week, reaching over $65 a barrel on Tuesday, its highest point since November.
José Torres, a senior economist at Interactive Brokers, indicates that Brent crude reaching $80 a barrel would likely constitute an oil price shock. In such a scenario, Torres suggests that bonds and stocks could experience a sell-off as higher energy prices might fuel inflation, potentially hindering economic growth. Elevated inflation could also limit the Federal Reserve's ability to reduce interest rates.
Matt Gertken, chief geopolitical strategist at BCA Research, assesses the odds of a "massive global oil supply shock" at approximately 40% due to recent tensions in Iran. Gertken noted that the fall of Iran's regime and increased regional conflict could lead to a "significant loss" in regional oil production. He also stated that global and US equities are vulnerable to a near-term correction given current overvalued and overbought conditions and escalating geopolitical risk.
Analysts at Deutsche Bank have also highlighted the risk of an oil shock this year, identifying a "positive supply shock to oil prices" as a key risk to their economic outlook, which would materially affect inflation expectations.
Jeff Currie, a commodities strategist at Carlyle, suggests potential for further increases in oil prices, citing high crude demand and elevated geopolitical risk factors. Currie commented that the situation in Venezuela and its impact on geopolitical risk is substantial, making the world "a lot more dangerous" for oil importers like China, India, and Europe.