The overall stock market dropped sharply Friday, with the SPDR S&P 500 Index (NYSE:SPY) closing down more than 1% in part due to investors’ fears of an imminent attack by Iran against Israel. While traders were selling stocks, they were buying oil in anticipation of a price hike due to a military escalation in the Middle East, where much of the world's oil is produced.
What Happened: Those fears were realized over the weekend with an Iranian attack on Israel, although a coalition of military forces from Israel, the United States, France and other countries defended a majority of the drone attacks. Still, many experts worry that the ongoing Israel-Hamas war in the Middle East could keep oil prices higher for longer, which increases the probability of a recession in the U.S. and other countries.
Analyst Take: Nick Colas, the co-founder of DataTrek Research, said that if oil prices hover at prices above $100 a barrel, a recession in the U.S. becomes increasingly more likely. Oil prices sat around $85 a barrel for WTI on Monday, trading lower after Friday's spike higher.
Quoted: "Crude prices are our chief concern," Colas said in a recent DataTrek newsletter. "But we are a long way away from the $125/barrel level that would almost certainly cause a recession if sustained."
Read Also: Oil, Gold Markets Swing From War Fears To Calm Over Israel-Iran Tensions: What Analysts Expect Next
The price of oil and its impact on macroeconomics is complex. For example, sometimes when oil prices are rising it is a sign of a strong economy as increased demand for oil indicates strong economic activity globally. But, in the case of oil prices rising dramatically due to geopolitical factors like war in the Middle East, it could take money out of the pockets of consumers as they are required to pay more at the gas pumps.
If Iran's attack triggers a broader conflict in the Middle East, it becomes more likely that oil prices will continue to rise. Gas prices have already gone up dramatically in recent months, reaching a national average above $3.60 according to AAA. Colas says that if gas prices surpass $5 a gallon, it could be very bad news for the economy. But, Monday's price action should give drivers a sliver of hope, as oil prices dipped.
Most major energy companies, like Chevron Corp (NYSE:CVX), Exxon Mobil Corp (NYSE:XOM) and Occidental Petroleum Corp (NYSE:OXY) dipped on Monday as oil prices also dropped.
There is a lag between crude oil prices and the cost of gasoline at the pump. Typically, when oil prices rise or drop, it takes a few weeks for those price changes to be reflected at the gas station.
But, if Monday's trend continues and the Middle East is able to avoid a further escalation, consumers may soon see relief at the pumps. If the opposite happens, it could be bad news, both for your portfolio as well as your wallet at the gas station.
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