Can the U.S. Economy Support Oil Prices at $200 Per Barrel?

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In June 2008, West Texas Intermediate oil prices popped to $145.31 per barrel. At the time, markets had experienced an incredible surge in commodity prices. Goldman Sachs predicted just a month earlier that oil would hit $200 per barrel within two years.

“The possibility of $150-$200 per barrel seems increasingly likely over the next 6-24 months, though predicting the ultimate peak in oil prices as well as the remaining duration of the upcycle remains a major uncertainty,” Goldman said at the time.

Goldman wasn’t the only Wall Street firm projecting a surge in prices. In May 2008, JPMorgan Chase announced plans to trade physical oil and projected a possible rise to $200 per barrel.

But the rally wasn’t meant to be. By September 2008, Lehman Brothers collapsed, setting off a great freeze in the credit markets and an ensuing collapse in the market. Then, six years later, JPMorgan abandoned its physical commodity division in a sale to Mercuria.

Well, it seems like déjà vu all over again, to quote Yogi Berra.

This week, JPMorgan Chase forecasted a scenario where oil prices top out at $200 per barrel or higher. But is such a price outcome even possible?

And what would it mean for stocks?

The Canary in a Coal Mine

JPMorgan Chase strategist Marko Kolanovic recently projected that oil prices could surge soon. The premise of the argument is primarily based on the recent highs for other energy commodity categories.

Oil prices are already trading at their highest levels in seven years.

Natural gas prices have doubled since May. Uranium, coal, and liquified natural gas (LNG) all trade at or near all-time high levels.

It is a bit stunning that coal prices have been pushed to current price levels. The world has been moving to reduce carbon-based emissions. However, the closure of natural gas and nuclear power plants has driven up demand at a time when coal supplies are waning.

“We believe the evolution of coal prices might reflect supply, demand, cost of capital and energy transitioning issues for all fossil fuels, and it would certainly be possible that oil prices will follow the same pattern (inflation adjusted for oil, that would be in a $150-200/[barrel] range),” Kolanovic said.

Supply chain problems have accelerated in recent months. Cargo ships remain in higher demand, and shipping prices have surged. In addition, the United States has experienced renewed tensions with oil-producing nations like Russia and Iran and large customers like China.

JPMorgan believes that a supercycle is possible and that demand could sharply outpace supply given the recent boom-and-bust cycle in the oil space.

Last decade, the world was awash in crude oil. That changed following the COVID-19 pandemic and ongoing efforts to take production offline. Remember that the U.S. government has been increasingly hostile to the industry. The Biden administration has canceled large pipeline projects, reduced access to drilling on federally owned lands, and engaged in other practices to limit the expansion of the industry.

Meanwhile, Biden has asked OPEC, the world’s largest oil cartel, and its allies like Russia, to increase production and help reduce oil prices. But naturally, OPEC has an obligation to its membership; OPEC countries like Saudi Arabia, Iraq, and Libya rely on oil sales to fund their government budgets.

This means OPEC is content with rising prices, particularly in the wake of a massive collapse in crude prices at the onset of the COVID-19 crisis. According to a report released last year, JPMorgan Chase has expected a supply deficit to start at the beginning of 2022.

What Do Higher Prices Do to the Market?

Higher oil prices naturally remain a severe threat to the U.S. economy and the broader stock market.

Most Americans still rely on gas-powered automobiles to get to work or take a vacation. Any additional hit to the pocketbook of Americans in the form of higher energy prices will impact their discretionary spending; this, in turn, will affect retail companies.

Higher energy costs  will also impact the business-to-business supply chain and drive up the cost of trucking shipments and transportation. Trucks deliver nearly everything to stores around the nation.

There’s also the plain reality that oil byproducts are in many consumer products — plastics, soaps, turbine blades, boats, shoes, carpets, and pharmaceuticals — though most people might not realize it. When oil prices rise, the macroeconomy will take a hit because it costs more money to produce consumer goods and other products.

The question for investors and economists alike is how high oil prices can rise before they hurt the stock market and broader economy.

JPMorgan’s Kolanovic said this week that the economy could withstand oil prices of $130 to $150. It remains to be seen, but Kolanovic has said that a market sell-off is more likely to result when the 10-year Treasury bond yield hits 2.5% to 3%.

Looking ahead, energy stocks would naturally benefit from a supercycle rise. In addition, global oil producers like Exxon Mobil (XOM) and Chevron (CVX) would benefit from rising prices as any uptick increases the value of their assets on the balance sheet.

The other beneficiaries are the companies that physically ship crude oil, like pipelines and freight carriers.

We can dig in to other stocks that stand to profit — or plummet — due to higher oil prices. Even if crude goes to $100 per barrel (and not $200), there is a significant opportunity ahead for energy stocks.