JP Morgan says central banks are unlikely to react to surging crude prices

MANDEL NGAN / AFP / Getty ImagesBOJ Governor Haruhiko Kuroda and ECB President Mario Draghi.
  • Brent crude is on the cusp of breaking through $78 a barrel for the first time in over three years.
  • It’s surged by close to 190% since early 2016.
  • JP Morgan believes central banks will likely look through the crude spike when deliberating monetary policy settings.

Brent crude, the global oil benchmark, busted through $76 a barrel for the first time since December 2014 on Monday.

It subsequently climbed above $77 a barrel on Wednesday.

Now it’s on the cup of breaking above $78 a barrel today.

As seen in the weekly chart below, it’s been on a relentless march higher since early April, extending its rally from the nadir of $27.10 a barrel hit in early 2016 to nearly 190%.

A stronger global economy, production curbs from both OPEC and non-OPEC producers, previous weakness in the US dollar and, more recently, geopolitical concerns surrounding Iran, have proven to be a potent mix.

With crude price now at the highest level seen in several years, the question many are now asking is what will it mean for markets?

It will almost certainly help boost inflationary pressures in the near-term, and possibly provide second-round inflationary effects should prices hold or continue to rally from current levels.

US bond investors have certainly taken notice, taking the yield on benchmark 10-year notes back above 3% on Wednesday.

Given recent investor skittishness whenever yields have risen, driven by concerns that inflationary pressures may lead to a faster withdrawal of ultra-easy monetary policy settings, no one can say with any real certainty as to how investors will react.

While he admits higher crude prices will boost inflation expectations and underpin bond yields, Kerry Craig, Global Market Strategist at JP Morgan Asset Management, doesn’t believe the surge in crude prices will have much of an effect on markets nor central bank policy.

“Higher oil prices will filter into higher inflation expectations and rising bond yields, adding upside risk to where yields may go this year and how equities react to prospects of another spike in yields. We still think there is some way to go before borrowing costs become punitive,” he says.

“History shows us that exogenous shocks that cause oil prices to spike and illicit a sharp response from central banks have the potential to bring the cycle to an early close.

“However, in this instance, we don’t see that transpiring. Central banks are likely to look through any rise in inflation driven by oil price moves, both up and down, as they have in the past.”

Craig says the crude rally will likely face headwinds soon as “non-OPEC and US shale producers turn the taps back on the longer prices remain above break-evens”.

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