Brent crude increased by +27% last week, the large

Brent crude increased by +27% last week, the largest weekly gain on record according to Dow Jones.

Short-term market swings don't have a lasting impact unless they affect the real economy in some way. There are three main ways high oil prices affect the real economy.

Most directly, rising crude prices impact the gas prices that consumers pay at the pump. The U.S. economy relies on the spending power of its consumers. If all of a sudden, consumers have to pay more every week to fill up their gas tanks, it'll likely affect how they feel about their finances and may cause them to cut back spending in other areas.

Higher oil prices also squeeze businesses, forcing them to pay more for energy. Companies in the manufacturing and industrials sectors are most affected by this, but it also influences the many tech companies that are building out energy-intensive AI data centers. When business expenses go up, and companies can’t pass those increases along as price increases, it cuts into corporate earnings, which impact stock prices.

Lastly, higher oil prices cause inflation to go up, which affects Fed monetary policy. The Fed has been in an interest-rate-cutting cycle since late 2024, but inflation has stubbornly persisted above the central bank's 2% annual target. An energy-related price shock could cause the next inflation report to read higher, which could make the Fed hesitant to cut rates at upcoming meetings. Investors are currently discounting two Fed rate cuts before year-end. If this doesn’t happen equity valuations could suffer.

Investors spent this past week trying to price these things into the stock market. The CBOE Volatility Index VIX closed above 29 on Friday, its highest level since last April when President Trump first unveiled much higher trade tariffs.

Investors are looking at previous crises that caused oil prices to jump. The best comparison seems to be early-2022, when Russia invaded Ukraine and the U.S., E.U., and their allies placed sanctions on Russian crude oil. Oil prices soared from $70 to $128/barrel, treasury yields rose from 1.5% to 4.2%, and stock prices sank by -25% over nine months. That said, 2022 was a time when the market was already battling a dramatic jump in inflation following Covid and central banks globally were hiking rates. Stocks slipped into a bear market as investors braced for a recession.

Investors are dealing with a very different economic environment today. Inflation and interest rates have fallen, leading to higher valuation multiples and elevated stock-market volatility, as investors have priced stocks to near-perfection. Any new risk causes equities to swing wildly. Past oil crises have tended to be short-lived, but investors are worried that things may drag on. Trump on Friday said there will be no deal with Iran without "unconditional surrender," and investors are worried Iran may escalate instead of give in.

If the conflict in the Middle East were to end in the coming days, oil prices would come down - but we could see a scenario where prices settle above their previous lows as traders price in a new risk premium to the asset, in case conflict breaks out again.

This coming week, investors will be paying close attention to further developments in the Middle East. They will also get more inflation data, with February's consumer-price index (CPI) due out on Wednesday and January's delayed personal-consumption expenditures (PCE) price index out on Friday.