Free Trial

Oil Prices, Inflation, and Fed Policies: Stock Market Risks

oil pump, industrial oil drilling equipment

Key Points

  • Oil prices are down from 2024's highs and aiding a slowdown in inflation, lulling the market to sleep.
  • The oil market is tilted upward, and prices are rebounding from the recent low, setting the market up for a rude awakening.  
  • The FOMC walks a tightrope with inflation and oil demand on one side and global economic recession on the other. 
  • 5 stocks we like better than Occidental Petroleum

Oil prices NYSEARCA: USO are near the low end of a multi-year trading range, aiding the broad market rally in stocks. Oil prices are a fundamental driver of inflation that compounds within the economy, and the inflation outlook is driving the market. Lower oil prices undercut inflation. 

United States Oil Fund Today

United States Oil Fund LP stock logo
USOUSO 90-day performance
United States Oil Fund
-1.90 (-2.38%)
(As of 07/19/2024 ET)
52-Week Range
Dividend Yield
Assets Under Management
$1.27 billion

The latest CPI data failed to spur the FOMC into action but aligns with the idea a shift is underway, and the next policy move will be to cut rates. Lower oil prices support that outlook, but there is also risk. In this environment, the economy is under pressure from high interest rates but biding its time; when the first interest rate cut comes, global economic activity will begin to improve, drive oil demand, lift the oil price, and drive inflation. That means the Fed will unlikely cut rates soon; higher for longer is getting longer and longer. 

OPEC+ Ends Voluntary Production Cuts, So What?

OPEC+'s decision to end production curbs and increase supply was among the causes of the latest corrections in oil prices. However, the details of the decision belie the bearish implications for oil prices, and the original statement was walked back and hedged in favor of higher, not lower, oil prices. 

Today, OPEC+ curbs production by 5.86 million barrels per day (bpd), or about 5.7% of global supply. Of that, 3.66 million daily barrels are official cuts, and 2.2 million are voluntary cuts. While the voluntary cuts are slated to end at the end of September, that is three months later than originally planned, and the curb won’t simply vanish. 

The cartel plans to slowly phase the 2.2 million barrels back into the market over a year, which will have little impact on the supply/demand imbalance. Demand is expected to grow with or without the FOMC cutting rates; it is no coincidence the cartel is timing an end to curbs to coincide with Fed rate cuts; investors should expect OPEC to alter its plans as the outlook for interest rates and inflation change. Coincidentally, OPEC walked back on its initial statement and said it could delay the increase in production if conditions warranted. 

The Fed's Decision is Tied to Oil Demand: It’s a No-Win Situation

The Fed’s decision to cut rates is as tied to the oil price as anything else. There is a clear correction with the rise in oil prices and the pace of inflation that will keep the committee from acting too soon. Cutting rates too soon will reinvigorate oil demand, create a bull market for oil, and lead inflation to new heights. The takeaway is that the FOMC can’t cut rates for fear of sparking a rally in oil. The only way it can control the oil price is to cause a recession with high rates. The committee is walking a razor's edge with rampant inflation on one side and recession on the other. 

Demand is another factor lulling the market to sleep. The IEA forecasts a sharp slowdown in demand beginning in 2023 that will lead to massive oversupply. That's bearish news. However, their forecast is based on anticipated technological advancements tied to electrification and renewable energy that may or may not happen. The mitigating factor is that demand growth may stall, but it won't disappear. We need oil for more than cars. With a finite oil supply (estimates have the supply at less than 50 years at current usage), there is nowhere for the price to go but up over time. 

Oil Price Moves Higher: Buffett Ups His Stake in Occidental Petroleum

And where is the oil price going now? The oil price is bobbing near its floor now and heading higher on recent data. An improving outlook for summer demand, OPEC’s assurance that it would keep supply tight if needed, and a reduction in the production growth forecast support the market. The price of WTI is heading back to the top of its range, which will likely keep inflation running hot. 

What are investors to do with this information? Invest in energy companies like Warren Buffet and Berkshire Hathaway NYSE: BRK.A are doing. The energy industry is contracting today due to the deleveraging of oil prices since 2022 but is still making profits. At $80, the oil price is trending above the 3-year, 5-year, and 10-year averages, putting the margin in the high-end range, generating solid cash flow, and allowing oil giants to invest in growth, efficiency, and shareholder value. 

Mr. Buffett chose Occidental Petroleum NYSE: OXY, which is paying down debt and buying back preferred shares to improve leverage ratios and shareholder equity. The latest news is a series of buys in June, the first in six months, bringing the stake to roughly 30%.

Trade West Texas Oil (WTICO) stock chart

→ Why we just sold half of our stocks (From Behind the Markets) (Ad)

Should you invest $1,000 in Occidental Petroleum right now?

Before you consider Occidental Petroleum, you'll want to hear this.

MarketBeat keeps track of Wall Street's top-rated and best performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat has identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market catches on... and Occidental Petroleum wasn't on the list.

While Occidental Petroleum currently has a "Hold" rating among analysts, top-rated analysts believe these five stocks are better buys.

View The Five Stocks Here

The 10 Best AI Stocks to Own in 2024 Cover

Wondering where to start (or end) with AI stocks? These 10 simple stocks can help investors build long-term wealth as artificial intelligence continues to grow into the future.

Get This Free Report
Thomas Hughes
About The Author

Thomas Hughes

Contributing Author

Technical and Fundamental Analysis

Like this article? Share it with a colleague.

Companies Mentioned in This Article

CompanyMarketRank™Current PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
United States Oil Fund (USO)N/A$78.00-2.4%N/A22.97N/AN/A
SPDR S&P 500 ETF Trust (SPY)N/A$548.94-0.7%1.25%N/AN/AN/A
Berkshire Hathaway (BRK.A)
0.206 of 5 stars
0.21 / 5 stars
Occidental Petroleum (OXY)
4.5129 of 5 stars
4.51 / 5 stars
Compare These Stocks  Add These Stocks to My Watchlist 

Featured Articles and Offers

Recent Videos

Opportunities Arise as Stock Market Rotates from Big Tech
3 Top Market Leaders Splitting Their Stocks
How to Navigate Stock Downgrades

Stock Lists

All Stock Lists

Investing Tools

Calendars and Tools

Search Headlines