The crude oil market has reached highs due to supply bottlenecks, travel resurgence, and pressure on drillers. Will it reach $100 per barrel?
With crude oil near three-year highs, it’s possible we’ll see $100 per barrel once again
Weak U.S. and OPEC output, supply bottlenecks, and strong demand may be driving prices up
Bearish factors include possible Fed tightening, production revival, and China’s crackdown on market speculation
What’s going to rescue the U.S. economy and markets from $100 per barrel crude, and do they even need rescuing?
Consider this: One of the best recent years for the U.S. stock market was 2013, when the economy really started to recover from the Great Recession of 2008. Through much of 2013, the price of crude was above $100 (compared with the mid-$70s in early July), and gas cost more than $3 per gallon across much of the country.
High crude didn’t make the wheels fall off then, and although the 2021 outlook is uncertain, the economy has been roaring ahead by most measures despite those higher energy prices. Plus, Energy sector companies have led the stock market charge, rising more than 40%.
Still, expensive gas can hurt many industries, including transports like airlines and trucking firms, but also some you might not initially think of. Most of the big Consumer Discretionary sector companies like Walmart (WMT), Target (TGT), and Amazon (AMZN) benefit on the bottom line by sourcing products in places like China where labor is cheaper and then shipping finished goods to the United States, Canada, and Europe.
The cost of shipping isn’t typically a huge determinant of companies’ operating margins, but expenses can certainly leave a dent when crude stays high, eventually figuring into bottom-line growth. Or the companies could pass along higher prices to customers, fueling inflation.
Another problem with high fuel costs is the impact on consumer spending. “When gasoline prices increase, a larger share of households’ budgets is likely to be spent on it, which leaves less to spend on other goods and services,” wrote the San Francisco Fed. Consumer spending drives more than two-thirds of economic growth, and higher gas prices act like an extra tax.
That said, many economists believe there’s been a breakdown in the relationship between pricey crude and gross domestic product (GDP) growth in recent decades. That may have been the case in 2013 as the economy revived despite elevated crude.
Companies across many industries have reduced their dependence on oil over the years, and cars and planes are far more efficient these days. Crude rallies might pack less of a wallop than back in the 1970s, when cars generally got 15 miles to the gallon and two oil shocks led to economic crashes.
What can’t be denied is that crude prices keep going up this year as we emerge from the COVID-19 pandemic, from below $50 in January 2021 to nearly $75 by late June. Is a ride to $100 for the first time since 2013 inevitable?
Here are some reasons crude might reach $100 per barrel after setting all-time lows during the COVID-19 sell-off of 2020:
FIGURE 1: HAND IN HAND: Over the last year, crude oil futures (/CL—candlestick) and the S&P 500 Index (SPX—purple line) have accompanied each other as they’ve risen much higher, with crude trailing the SPX just slightly. Data sources: CME Group, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.
What could keep crude from reaching $100?
Crude may or may not get to triple digits in the near future. And even if it does, it’s not a given the economy will be any worse for the wear.
For every argument pointing to concern, there’s a counterargument saying that either crude prices will stabilize or even fall—or, if prices remain high, the economy will take them in stride, at least in the short term.
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