Things are heating up in the energy market.
The Trump administration announced Monday that it would end exemptions to its sanctions on Iran, a move meant to significantly curb Iran’s oil output. Crude prices surged after the announcement, with the U.S. benchmark, West Texas Intermediate crude, gaining nearly 3 percent.
Here’s what experts say higher oil prices could mean for the broader market:
Savita Subramanian, head of U.S. equity and quantitative strategy at Bank of America Merrill Lynch, said a significant uptick in the price of crude would likely be a double-edged sword:
“[Higher] oil is actually good for corporate profits because the S&P [500] is levered to oil, so I think this could be a source of positive earnings surprise[s] for the year where analysts are penciling in super low expectations. So I think that’s one potential silver lining of higher oil. And then … consumers are making more money, so we might not feel that energy pinch until we get to higher levels. But $5 a gallon in California is not a good environment to be in, so we’re getting to a point where this could turn ugly.”
Aperture Investors CEO Peter Kraus didn’t anticipate major changes to the status quo:
“I think the oil prices are going to continue to reflect this sort of restriction in supply. And we’re not going to see a lot of new drilling based on these prices. We’re not going to see more holes being punched into the world to create more oil at these current prices. And so my guess is that economic activity stays where it is [and] oil prices will remain relatively constant. […] People predicted oil was going to go to $100, $120 a barrel, which I don’t see happening.”
Alex Dryden, global market strategist at J.P. Morgan, said macroeconomic global risks could catch up to the oil market itself:
“I think what you’re looking at is incoming restrictions on supply. That’s going to couple with what we’ve been seeing in Venezuela, this likely forcing the oil price up [like] we’ve seen this morning. Now, again, it’s about how sustainable that oil price is. You look at … the futures market. Go three years out — you typically go out that far when you want to take out political risk and look at how much geopolitical risk premium [is] priced into oil. Right now, it’s some of the highest levels since the Arab Spring. That’s not exactly a great backdrop for energy companies to really be able to continue to put that oil number in in a reliable way going forward. So, certainly some question marks over it.”
RBC Capital Markets’ head of U.S. equity strategy, Lori Calvasina, was fairly bullish on the prospect of higher oil prices for the broader market:
“We actually think higher oil prices are good for our S&P 500 [earnings per share] estimate. It tends to be good for energy company earnings. Of course, there are puts and takes with margin pressures, but generally, we think higher oil prices are good for their earnings outlook, generally. I would say energy [is] this sector [that] looks super cheap to us. You’re in the middle of an earnings revision rebound in that space; 2020 earnings expectations actually look pretty good. I think, as long as that can hold up, I actually think this can help generate excitement in the space.”