Dear Reader,
This is Dylan Jovine with Behind the Markets.
Happy Wednesday. Today is Wednesday, March 11th.
We haven't talked much about oil.
And I'll tell you something — years go by with less activity in the oil market than we have witnessed in just the first few days of this week alone. It's really unbelievable. It is actually historic.
The lingering question — the big question for us — is how does it all end?
Crude prices surged to $120 a barrel.
That is a sharper and more sudden rise than even occurred in the early days of the Russian invasion of Ukraine. Prices have since settled back down, but it's still very volatile. And it seems to track the president's musings on the length of the war.
A friend of mine asked me last night when I think the war ends. Who knows? Only DJT himself knows that. But I'll tell you one thing — he's starting to signal that an ending is near from his point of view. He doesn't have the political appetite for this. He's hearing from people who are getting crushed. The messaging from constituents around the country is not good.
The fascinating thing is that Trump might want to stop it, but we haven't seen Iran's reaction yet. So we'll see how that plays out.
I'll tell you one thing — this volatility is a good reminder of how lucky we are in America.
Because the more oil you import, the worse your markets have done over the past couple of weeks. European and Asian markets have gotten hammered. They import a lot. Their markets have literally gotten crushed.
That's exactly why energy security is becoming one of the most important investment themes of this decade.
Countries that control their own energy — or have reliable access to it — are going to have a massive advantage in the years ahead.
That's why I put together a special briefing explaining our #1 energy stock of the decade.
As I record this, oil futures are settling around $80 a barrel. That's not $120, but it's still a 33% increase from $60 just a month and a half ago.
That is a significant, very inflationary increase.
And here's what history has taught me.
These kinds of inflationary shocks really go one of two directions, and what happens next depends largely on what central banks choose to do.
There's a note out from Henry Allen of Deutsche Bank that I think is worth paying attention to. He lays out three conditions that need to be met for an oil shock to actually trigger a real bear market.
Condition one: a large and sustained oil price spike of at least 50% to 100%, held over several months. We've seen a massive spike — oil went from $60 to $120 at its peak, a 100% move. But it's now settling around $80. History says you need that 50% increase sustained over three months for it to qualify as a proper inflationary shock. We're not there yet.
Condition two: a hawkish policy response. If the spike in oil pushes the Fed to actually raise rates to fight the resulting inflation, that's the second ingredient for a bear market. Betting markets are already saying the Fed may raise rates now, because higher oil filters through everything and makes everything more expensive. With inflation already sitting at 3%, does it spike to 3.5% or 4%? Does that force the Fed's hand? That is a very real thing we have to watch.
Condition three: broader macroeconomic damage. Basically, is the shock big enough to tip an already slowing economy into recession? And lost in all this craziness — Friday's jobs numbers were not good.
Economic growth is slowing. Corporations are frozen in their tracks.
Do I open the factory? Do I make a left or a right? AI confusion, policy confusion, tariff confusion. A lot of manufacturing powerhouses that would otherwise be creating jobs are paralyzed, not knowing what to do because the policy keeps shifting left and right.
So where does that leave us? We are keeping a close eye on all three conditions.
None of them have been fully met yet.
But make no mistake about it — you are living through history, ladies and gentlemen. This has been some week for the oil market.
The revenge of oil.
Anyway, that's all I have. Have a good day. I'll speak to you tomorrow.
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