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As geopolitical tensions escalate, analysts point to the risk of an oil price shock.
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Oil prices rose 10% last week amid tensions between the United States and Venezuela and unrest in Iran.
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One economist said rising oil prices could stoke inflation and lead to a sell-off in stocks and bonds.
Oil prices soared. Inflation fever. Markets are turbulent.
It’s a scary combination that the U.S. economy experienced in the 1970s, but analysts say as geopolitical conflicts escalate, the risk is rising of another oil price shock, a sudden surge in oil prices that triggers a domino effect of negative market and economic consequences.
Oil prices have soared in recent weeks as the United States launched a surprise attack on Venezuela and threatened military action against Iran, the world’s two largest crude producers.
The international benchmark Brent crude oil March contract rose 10% last week and rose as much as 3% on Tuesday, rising to above $65 a barrel. This is the highest price for Brent crude since November.
José Torres, senior economist at Interactive Brokers, said that if Brent crude oil prices hit $80 a barrel, it could constitute an oil price shock.
In this scenario, Torres said he believes bonds and stocks will sell off at the same time because rising energy prices could stoke inflation, dragging down economic growth. Rising inflation could also mean the Federal Reserve has less room to cut interest rates in the future, a major catalyst that has pushed risk assets higher over the past year.
“There’s definitely a risk of an oil price shock, especially after three years of strong stock market gains,” Torres told Business Insider, referring to several consecutive years of double-digit gains for the S&P 500.
Matt Getken, chief geopolitical strategist at BCA Research, said recent tensions with Iran have raised the likelihood of a “large-scale shock to global oil supplies” to around 40%. He wrote in a note to clients this week that if the Iranian regime collapses and conflict in the region intensifies, it could result in “significant losses” in oil production in the region.
“Given the elevated and overbought conditions of valuations and the current escalation of geopolitical risks, global and U.S. equity markets are likely to face a correction in the near term,” Getken added.
Analysts at Deutsche Bank also pointed out that there is a risk of an oil shock to the market this year.
“A positive supply shock to oil prices would weigh heavily on inflation expectations and inflation risks,” the bank wrote in a recent client note, calling the scenario a key risk to its economic outlook.
