Oil prices have been a major topic of
discussion in the financial world, and for good
reason. The Federal Reserve's decision to hike
interest rates is closely tied to the performance
of crude oil prices. Analysts at JPMorgan have
recently released a note that highlights how oil
prices have performed following the last Fed
rate hike in a tightening cycle.
According to JPMorgan, since 1988, the final
increase in a tightening cycle has been
followed by increases in the price of Brent
crude three months later, returning on average
9%. This means that if the Fed pauses its rate-
hiking campaign soon, oil prices are expected
to perform well. Markets are expecting the Fed
to raise rates one more time in May, then
pause.
JPMorgan predicts that Brent crude will rise to
$94 a barrel in the fourth quarter, up 9.5%
from current levels. This bullish outlook is due
to the expectation of the Fed pausing its rate
hikes. However, JPMorgan has also pointed
out that in the past, oil prices eventually
turned negative after Fed pauses in 2000,
2006, and 2018 were followed by recessions.
Therefore, there is still some uncertainty
surrounding the future performance of oil
prices.
Analysts expect demand for oil to remain
resilient as the need for transportation fuel
remains elevated, and US commercial crude
inventories are starting to shift downwards.
Additionally, JPMorgan predicts that a
recession will show up at the end of 2023, or in
2024, but if the US sees only a mild recession
or lands softly, a new bull market may have
already started forming.
Despite this positive outlook, inflation is
expected to remain high this year, which could
lead to the Fed maintaining its current
monetary policy. Others on Wall Street are less
worried about a major recession, with
BlackRock CEO Larry Fink crediting the large
amount of federal stimulus as enough to rule
out a hard landing.
In conclusion, JPMorgan's note highlights the
close relationship between the Fed's interest
rate decisions and the performance of crude oil
prices. While the expectation of a pause in rate
hikes is positive news for oil prices, there is
still some uncertainty regarding the future
performance of the commodity. The demand
for oil is expected to remain resilient, but the
potential for a recession cannot be ignored.
Social Plugin