Tumbling oil prices could provide a massive tailwind for global stock markets by prompting a broader equity rally and clearing a path for central banks to cut interest rates, Karen Ward, the Chief Market Strategist for EMEA at JPMorgan Asset Management, said on Monday, as a tentative U.S.-Iran peace deal is digested by markets.
Investors are currently treating higher oil prices as a threat to stocks because of inflation and growth concerns.
Oil prices plummeted on Monday following the announcement of a peace deal between the U.S. and Iran to halt their nearly 4-month war. The agreement will pave the way to reopen trade through the critical Strait of Hormuz, easing global concerns about oil supply disruptions and energy inflation. Brent crude for August delivery fell 4.87% to trade at $83.08 per barrel at 9.21 am ET on Monday, while WTI crude for July delivery shed 5.4% to change hands at $80.30/bbl.
Ward said investors had begun moving money beyond the handful of mega-cap technology stocks that have dominated markets in recent years and into a wider range of sectors before the Iran war disrupted that trend. Surging oil prices reignited inflation concerns and pushed investors back toward defensive positions. With crude prices now falling on hopes of a lasting U.S.-Iran agreement, Ward believes inflation risks are easing, creating conditions for broader participation in the equity rally and giving central banks greater flexibility to lower interest rates.
Just in March, JPMorgan analysts had warned that sustained oil prices above $90-$120 per barrel could trigger a 10%-15% correction in the S&P 500 and materially damage growth.
Further, cohesion within the OPEC cartel is showing signs of fragmentation, creating downward pressure on oil prices. The loss of a major producer after the UAE’s official withdrawal from OPEC in May , coupled with recurring quota disputes and downgraded global demand growth forecasts, limits the cartel’s control over supply and puts structural downward pressure on oil prices. UAE’s exit removes ~15% of the cartel’s production capacity and introduces unconstrained supply, fundamentally weakening the group’s leverage over the market.
Meanwhile, Gulf nations are actively trying to accelerate the monetization of their underground reserves before prices drop even further, flooding the market with additional supply.
By Alex Kimani for Oilprice.com
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