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Let’s talk about oil a bit… the silent mover with massive implications. We saw a huge spike in oil prices Wednesday, driven by rising geopolitical tensions in the Middle East.
A roughly 8.5% swing in one day is nothing to sneeze at, even though prices came back down a bit. With oil ripping from its lows, you have to ask: Is this just market noise, or is this signaling a bigger trend shift?
Historically, oil tends to fluctuate based on supply-demand dynamics, but the added layer of geopolitical risk makes it an even more unpredictable asset. Right now, Middle East tensions are ramping up, and that’s adding pressure to prices.
Combine that with potential supply disruptions, and we could see oil staying elevated for a while. But here’s where it gets tricky for traders…
If oil prices continue to rise, inflation might follow closely behind.
The market loves to discount the long-term impacts of energy costs on inflation, especially when the Fed tends to focus on core inflation, which conveniently excludes food and energy. But let’s face it – consumers don’t get to exclude gas and groceries from their monthly budgets. If oil keeps running higher, that sticky inflation at the pump and the grocery store will be hard to ignore.
The Inflation Trap
Here’s where we might be heading into dangerous territory. While inflation has been trending down, don’t get too comfortable.
CPI might print a low number in the short term – we’re even expecting a possible 2.2% or 2.3% in the next reading. But the problem is that inflation metrics are lagging indicators.
What’s happening right now with oil prices could take a few months to show up in those inflation reports… And by then, the market might already be in a tough spot.
If oil holds this upward trend, we might see inflation start to re-accelerate into 2024. And if that happens, the Fed’s goal of getting inflation back to 2% could get derailed. Traders need to watch for this potential shift closely.
The Fed has signaled rate cuts, but if inflation starts ticking higher again, that accommodative stance could quickly evaporate.
What’s crucial to understand here is that while the market might shrug off a couple of hot inflation prints, a sustained rise due to oil could change the game. Inflation may be temporarily under control, but if oil continues climbing, we’re likely in for some ugly surprises in the months ahead.
That means the market could quickly turn bearish if inflation reignites, and the Fed has fewer tools to combat it.
So, keep your eyes on oil – it’s not just about energy stocks…
It’s about the broader implications for inflation and the Fed’s next move. For now, it’s a waiting game, but the signals are clear: Rising oil prices could throw a wrench in the market’s inflation expectations. Stay vigilant, stay flexible, and don’t get complacent.
I’ll see you in the markets.
Chris Pulver
Chris Pulver Trading
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*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
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