Oil Price Surge to Rekindle Inflation Risk $95.

Just when everyone was beginning to feel relieved about inflation, Japan has broken from the Allies and purchased Oil from Russia. Above the Cap price.

With much of the world now trading with Russia at almost normal and in some cases increased levels, the Rouble is strong.

Of even greater concern to the West however, particularly in Europe where there is already considerable unrest around higher energy prices, will be this latest shift in the structure of global Oil markets.

Saudi Arabia has just said it will be reducing production further. As well as Japan buying from Russia above the Cap. This all points to a build up of demand that could quickly see the price of Oil racing higher. Yet again. Creating both political waves across Europe and even higher general inflation in the USA, leading to renewed pressure on the Federal Reserve to keep hiking rates aggressively.

The Oil price could be headed back toward $95 on the back of these developments.

Equity markets had been rallying on the hope that inflation would continue to fall, and the declines had appeared to have just resumed after a few months re-acceleration. Now, however, should the price of Oil continue to sky rocket as it has already in early Asia trading, then both the Fed and the ECB will be immediately aware of what this will mean. Higher inflation than what was thought to be the worst case scenario.

These developments mean there is now a much higher Oil price potential.

Given the already tight pricing across both manufacturing and services sectors, increases in the Oil price quickly hit the Gasoline pump prices and flow directly and fully into the costs of all services and products. There is no slack in pricing that could absorb another round of high Oil prices.

As long as the banking crisis, which is on-going, can be kept off centre stage at least, this renewed risk to the inflation outlook could well have the Fed hiking rates by a further 100-150 points this year.

Neither the economy or stocks are quite in the escape trajectory that many had begun to hope for in the the past few weeks.

While the up-coming US jobs data will be important to markets, the rise in the price of Oil could well become the centre piece of this week’s global markets board. Impacting bond, equity and currency markets heavily.

A higher Oil price means higher rates which create a heavy one two knock out scenario for the US and EU economies.

After the gains of the past week, it may well be time to reconsider long stock positions after all.

On the currency front, the Euro and the Australian dollar would also be vulnerable.

Clifford BennettACY Securities Chief Economist

The view expressed within this document are solely that of Clifford Bennett’s and do not represent the views of ACY Securities.

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