$BTC Oil prices continue to rise due to ongoing tensions in the Middle East. UK Brent crude oil reached $112, while US crude oil is trading at $97. It is crucial to understand the medium to long-term impact of rising oil prices on inflation and the economy, as this helps us support our macroeconomic arguments for this year and next. Historically, sharp rises in oil prices have often been accompanied by recessions in the global economy and the United States.

Essentially, higher oil prices lead to higher inflation indicators and stricter policy. The Federal Reserve has already raised its personal consumption expenditure (PCE) forecast for this year. Higher oil prices also affect transportation and energy costs, leading to price increases across industries and impacting consumption. Reduced consumption means slower growth, investors reassess asset valuations, and asset markets also become sluggish.
Historically, over the past few decades, we have experienced 5 major oil crises, which occurred in 1973, 1979, 1990, 2008, and during the COVID-19 pandemic in 2020. These periods were characterized by sharp rises in oil prices due to different reasons. What these periods have in common is that they were all followed by declines in asset markets. Not all recessions were directly caused by rising oil prices, but they did play an important role. During these periods, the S&P 500 index fell an average of 30%. Whether a similar situation happens this time will depend on how long the conflict lasts, and more importantly, the extent of damage to infrastructure. Opening the Strait of Hormuz is something that doesn't require too much time, but restoring damaged infrastructure takes time, which could keep oil prices elevated for a longer period. All else being equal, this aligns with our macroeconomic arguments, which we will leverage over the coming months as these developments unfold.