As U.S. benchmark crude trades north of $120 a barrel on speculation Washington and its allies could soon move to embargo imports of Russian oil, investors and analysts continue to assess the implications for the stock market.
And one market economist is warning that sudden price shocks can still pose a danger to equities, even though soaring oil costs aren’t the drag they used to be on the economy.
“History suggests that large disruptions to oil supply, which a proposed ban on imports of Russia’s oil would probably represent, could weigh heavily on the U.S. stock market,” said Thomas Mathews, markets economist at Capital Economics, in a note.
West Texas Intermediate crude for April delivery
jumped $5.45, or 4.7%, to $121.13 a barrel on the New York Mercantile Exchange, up nearly 32% since Feb. 23, the day before Russia’s invasion of Ukraine. The U.S. benchmark briefly traded above $130 a barrel for the first time since 2008 in overnight trade.
May Brent crude
the global benchmark, surged $7.31, or 6.2%, to $125.42 a barrel, up by around 33% from its preinvasion level after trading as high as $139.13 Sunday evening.
Crude’s latest leg higher came after U.S. Secretary of State Antony Blinken on Sunday said the U.S. and its allies were considering a ban on Russian imports. Gains moderated somewhat after German Chancellor Olaf Scholz appeared to push back against the most drastic options, Mathews noted.
Western countries have hit Russia with heavy sanctions aimed at separating its economy from the global financial system. But they had moved to exempt energy exports given soaring global inflation and Western Europe’s heavy reliance on Russian energy flows, though Russian crude has struggled to find buyers as traders and others appeared to “self-sanction” amid fears of running into legal trouble, analysts had noted.
U.S. stocks have seen volatile trade since Russia’s invasion, with benchmarks initially taking out their January lows before bouncing last week to trade above their preinvasion level. But stocks were back under pressure after crude’s latest upside push, with the Dow Jones Industrial Average
down around 590 points, or 1.8%, while the S&P 500
slumped 2.2% and the Nasdaq Composite
Analysts have noted that past geopolitical crises have tended to have only fleeting effects on stock-market returns.
And the stock market’s relative resilience in the wake of the invasion also comes as yields on safe assets have retreated significantly from preinvasion levels, Mathews said. The 10-year Treasury yield
trading near 2%. The 10-year yield was up 1.5 basis points Monday near 1.75%. Yields and debt prices move opposite each other.
Mathews said the research firm also shares the widely held view that a jump in oil prices will be only a small drag on economic activity.
Nonetheless, oil shocks have spelled trouble for the stock market in the past, he noted, and likely offer some lessons even if the economic circumstances have changed.
The 1973 oil embargo by the Organization of the Petroleum Exporting Countries, or OEPC, saw oil prices triple and the S&P 500 fall by around 15%, continuing to fall even after the embargo was lifted, eventually declining almost 50%from its pre-embargo peak.
The stock market’s stumble can’t be attributed solely to the embargo, Mathews acknowledged, noting that investors were also dealing with the collapse of the Bretton Woods system and a Fed that was tightening policy from the early-to-mid-1970s and a U.S. economy that had slumped into recession by late 1973.
But the oil-supply disruption was probably an important factor, he said, as it played a role in causing the recession and feeding sustained high inflation through the rest of the decade.
Other episodes offer a “more mixed picture,” he said. The S&P 500 rose by around 40% in 1979-80 despite a roughly 150% rise in oil prices in the aftermath of the Iranian revolution and amid the Iran-Iraq war. And while the index fell by around 15% after Iraq’s 1990 invasion of Kuwait — when oil prices doubled — it recovered swiftly as oil prices fell back down, returning to its previous peak within three months.
But the Iraq-Kuwait war does illustrate how quickly investor sentiment can deteriorate, and how far equities can fall, after an oil supply shock, Mathews said.
The examples also indicate that the long-run effect of oil disruptions on the stock market depend on the effect they have on the economy and monetary policy.
“The direct hit to economic growth might be smaller now than it has been in the past. But with inflation already high anything that adds to it could see the Fed eventually have to tighten by quite a bit more to bring it back under control,” Mathews wrote.
That can spell serious trouble for the stock market, he said, and while Capital Economics doesn’t think “we’re there yet…the risks of a rerun, at least in the oil and equity markets, seem to be growing.”