Oil prices rise, but not by enough to drag Wall Street far off its records
Key keywords: oil price hike, Wall Street record highs, US stock market performance, OPEC+ production cuts, Federal Reserve interest rate cuts, inflation expectations, WTI crude futures, energy sector earnings
Latest trading data released on April 12, 2024 shows that West Texas Intermediate (WTI) crude futures for May delivery rose 2.3% last week to settle at $78.42 per barrel, while Brent crude futures for June delivery gained 1.9% to close at $82.71 per barrel. The moderate price increase was driven by escalating geopolitical tensions in the Middle East and repeated signals from OPEC+ leaders that the alliance will extend its voluntary production cuts of 2.2 million barrels per day through the end of the second quarter, rather than rolling them back as some market participants previously predicted.
Prior to the weekly settlement, many investors feared that a sharp oil price rally would reverse months of progress on cooling U.S. inflation, forcing the Federal Reserve to delay its widely anticipated interest rate cuts that have been the primary driver of Wall Street’s 12% rally since the start of 2024. However, the final weekly gain was less than half of the 5%+ jump that analysts had warned would trigger a significant market pullback, leading to an extremely muted reaction across major U.S. stock indexes. The Dow Jones Industrial Average slipped just 0.12% for the week, the S&P 500 edged down a mere 0.08%, and the tech-heavy Nasdaq Composite even rose 0.32% amid strong earnings reports from leading semiconductor firms. All three indexes remain within 0.5% of their all-time closing highs set earlier this month.
The energy sector was the top-performing segment of the S&P 500 last week, posting a 1.8% gain that offset minor losses in the healthcare and consumer staples sectors. Major energy firms including ExxonMobil and Chevron saw their share prices rise by more than 2% each, with multiple investment banks raising their 12-month target prices for the stocks on expectations of higher quarterly earnings driven by the firmer oil price environment.
Economists note that the current oil price level is still 7% lower than the peak hit in September 2023, and national average gasoline prices have only risen 3 cents per gallon over the past month to $3.42, putting minimal pressure on household disposable income. As of April 12, futures markets still price in a 68% probability of the Federal Reserve delivering its first 25 basis point rate cut at its June meeting, down just 3 percentage points from a week earlier, indicating that investors do not see the current oil price rally as a threat to the central bank’s disinflation trajectory. Market participants are now shifting their focus to the April 16 consumer price index (CPI) report, which is expected to show that core inflation fell to 3.7% year-over-year in March, the lowest level since early 2021.
Featured Comments
As a retail investor holding both energy ETFs and large-cap tech stocks, this is pretty much the ideal market outcome right now. The small oil price bump boosts my energy holdings without spooking the Fed into keeping rates higher for longer. I’m holding all my positions and expecting the S&P 500 to hit a new all-time high next week if the upcoming CPI print comes in line with expectations.
People are way overstating how much this minor oil rally will impact broader inflation trends. OPEC+ has been signaling it would extend production cuts for months, so most of this price increase was already priced into markets. We’d need a major unplanned supply disruption, like a prolonged closure of the Strait of Hormuz, to push oil above $90 per barrel, which is the real threshold where we’d start to see meaningful inflationary pressure hit stocks.
The Fed explicitly excludes volatile food and energy prices from its core inflation metric for exactly this kind of scenario. Small, short-term swings in oil prices don’t change the broader disinflation trend that’s been playing out for 10 months now, so it makes total sense that Wall Street is barely reacting. The only thing that would derail the current rally is a surprisingly hot CPI report that pushes rate cuts to July or later, not this trivial oil price gain.