Will Oil Be the Straw That Broke the Market’s Back?

Some commentators are apparently surprised that oil is heading toward $100 per barrel now. Really, though, what’s surprising is that it took so long for the petroleum price to reach this level.

Nearly depleting the Strategic Petroleum Reserve, after years of the government discouraging domestic producers to pump oil, was bound to push petroleum prices higher and create pain at the gas pumps. And when the oil price is high, many other products are bound to be more expensive because it costs more to ship them.

OPEC+ nations, including Saudi Arabia and Russia, have strategically chosen to cut back on petroleum production and exports. Also, the current U.S. administration sold close to 200 million barrels of crude oil from the Strategic Petroleum Reserve.

Now, the Strategic Petroleum Reserve is at a 40-year low and the Saudi government has shown unequivocally that its allegiance isn’t with the U.S. To quote Eurasia Group analyst Raad Alkadiri, “There’s absolutely the risk that” the Saudis “start to become ‘Exhibit A’ if Washington wants to blame someone for high pump prices or a slowing economy again.”

Yet, with an election year coming up, it’s unlikely that American voters will take their frustrations out on Saudi Arabia. There may be swift change coming, and oil could be the proverbial straw that broke the economy’s back.

Courtesy: @charliebilello

Travelers are already experiencing the fallout from the in-progress oil shock. Jet fuel costs are skyrocketing, so don’t be too surprised if U.S. airline carriers suffer major economic setbacks.

Meanwhile, all eyes are on the Federal Reserve and its course of interest-rate hikes. At some point, now or in the future, the Fed will have to respond to a broad-based inflation uptick prompted by elevated petroleum prices.

In other words, irrespective of whether the Fed raises interest rates in the near term, “higher for longer” rate policy is practically unavoidable at this point. Moreover, don’t assume that oil prices will back down anytime soon. Military tensions are flaring up between Azerbaijan and Armenia right now, and that’s worrisome because Azerbaijan is a significant oil and gas producer and exporter.

Making matters worse, the U.S. Energy Information Administration warned that U.S. oil output from top shale-producing regions is expected to fall for a third month in a row in October, to its lowest level since May of 2023.

Courtesy: Bloomberg

On top of all that, Citigroup analysts and Chevron CEO Mike Wirth both recently predicted that Brent crude per-barrel oil prices could exceed $100 a barrel this year. It’s fair to assume that they expect WTI crude oil to move higher, as well.

Again, the real “oil shock” is that this didn’t happen sooner. Forced underinvestment in the U.S. oil patch couldn’t have had any other result than persistently high gasoline prices.

Still, I’m not recommending that investors should chase oil stocks higher now. Instead, the most prudent strategy is diversification. The so-called “Magnificent Seven” are particularly vulnerable when inflation and interest rates are both elevated.

Besides, oil isn’t the only commodity you can invest in. Gold, silver, and uranium stocks have been worthwhile holdings for a long time, but now they’re more than just worthwhile – they might actually be a necessity.