Fears are brewing over an oil-price shock that could rattle markets and the economy
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- Analysts have flagged the risk of an oil price shock as geopolitical tensions escalate.
- Oil prices have climbed 10% in the last week amid tensions between the US and Venezuela and unrest in Iran.
- Higher oil prices could stoke inflation and lead stocks and bonds to sell off, one economist said.
Soaring oil prices. Hot inflation. Turmoil in markets.
That was a dire combination the US economy saw in the 1970s, but analysts say that the risks of another oil price shock — a situation where oil prices abruptly surge and set off a domino effect of negative consequences in markets and the economy —are on the rise as geopolitical conflict escalates.
Oil prices spiked in recent weeks as the US conducted its raid on Venezuela and threatened to take military action in Iran — two of the world's largest crude producers.
March contracts for Brent crude, the international benchmark, rose 10% in the last week to trade around $65 a barrel on Tuesday.
It's the highest Brent has traded since November.
Should Brent oil hit $80 a barrel, that would probably constitute an oil price shock, according to José Torres, a senior economist at Interactive Brokers.
In that scenario, Torres said he believes bonds and stocks would sell off in tandem, as higher energy prices could stoke inflation, which could weigh on economic growth. Higher inflation could also mean the Fed has less room to cut interest rates down the line, a major catalyst that has pushed risk assets higher in the past year.
"Definitely there's risk for an oil price shock, especially with stocks coming up for three really robust years," Torres told Business Insider, referring to the back-to-back years of double-digit gains for the S&P 500.
Matt Gertken, the chief geopolitical strategist at BCA Research, said that recent tensions in Iran have raised the odds of a "massive global oil supply shock" to around 40%. Should Iran's regime fall and conflict in the region increase, that could result in a "significant loss" in oil production around the region, he wrote in a note to clients this week.
"Global and US equities are exposed to a correction in the near term given overvalued and overbought conditions and escalating geopolitical risk at the moment," Gertken added.
Analysts at Deutsche Bank also flagged the risk of the market experiencing an oil shock this year.
"A positive supply shock to oil prices would materially impact inflation expectations and inflation risks," the bank wrote in a recent client note, calling the scenario a key risk to their economic outlook.
Jeff Currie, a longtime commodities strategist and the chief strategy officer of energy pathways at Carlyle, added that he believes there could be further upside risk to oil prices. He pointed to factors such as high demand for crude and "quite high" geopolitical risk, which could make oil more expensive.
"The situation in Venezuela, the impact on geopolitical risk is very large," Currie told CNBC last week. "For oil importers, whether you're China, India, or Europe, the world got a lot more dangerous."