Oil Prices and Global Markets: A Week of Nervous Trading

Strategic Insights -

Global financial markets were put to the test this week as oil prices reached record highs following last weekend's attacks in Saudi Arabia. The US crude oil futures market saw a record intraday high of $42.45 a barrel in New York on Tuesday, although prices pulled back below $39 the next day after OPEC's decision to raise official output quotas. Despite the volatility, world stock markets held their nerve, with the Dow Jones Industrial Average rising 0.5 percent on the week and the FTSE Eurotop 300 index closing 0.8 percent higher.

Key Takeaways:

  • The recent attacks in Saudi Arabia, Iraq, and Pakistan have had a muted market reaction, suggesting that traders have already discounted significant supply risks.
  • Oil prices are likely to reflect Saudi Arabia's commitment to lowering prices, with the kingdom serious about addressing market concerns.
  • The current spike in oil prices is not unprecedented, with oil costing $40 a barrel in 1990 ( equivalent to $50 today) and prices in the 1970s being equivalent to $90 in current terms.
  • The proposed handover of government in Iraq and the June 30 meeting of the Federal Open Market Committee in the US present significant hurdles for financial markets.
  • The US labor market is experiencing a period of rapid growth, with 248,000 jobs added in May, making a US rate rise a distinct possibility at the upcoming FOMC meeting.
  • European markets were modestly lifted by Wall Street's gains, with the European Central Bank's decision to keep interest rates on hold coming as no surprise to the markets.
  • Asian markets took a hit from the spike in oil prices, with the Nikkei 225 Average falling 1.6 percent over the week.
  • Pacific markets continue to perform well, with the MSCI Pacific index gaining 6.1 percent in dollars terms in the first four months of the year, driven by strong gains in Korea and Japan.

Statistics:

  • US crude oil futures reached a record intraday high of $42.45 a barrel in New York on Tuesday.
  • Prices pulled back below $39 the next day after OPEC's decision to raise official output quotas.
  • The Dow Jones Industrial Average rose 0.5 percent on the week.
  • The FTSE Eurotop 300 index closed 0.8 percent higher.
  • Pacific markets gained 6.1 percent in dollar terms in the first four months of the year.
  • The US labor market added 248,000 jobs in May, the third consecutive month of strong growth.
  • Inflationary pressures are rising, with signs of a potential US rate rise at the upcoming FOMC meeting.

Sources:

  • Deutsche Bank: Adam Siemenski
  • M&G: John Hatherly
  • Nomura: Anais Faraj
  • Goldman Sachs: Jim O'Neill
  • Capital Economics: Paul Ashworth
  • Morgan Stanley: Elga Bartsch
  • Standard & Poor's: Pacific market update