Bank of America is warning investors not to chase oil prices higher if crude climbs above $100 per barrel, arguing that prices at those levels tend to trigger government and central bank responses aimed at cooling the economy.
The bank said oil has already been one of the biggest market movers this year. Crude prices are up nearly 70% year-to-date, far outpacing broader commodities, which are up about 41%, and gold, which has gained roughly 17%. Over the same period, the S&P 500 has fallen about 2.5%, while bitcoin has dropped around 20%.
According to Bank of America, oil rallies of this size rarely go unchecked for long because high energy prices ripple through the entire economy. Expensive oil pushes up gasoline, transportation, and manufacturing costs, which in turn tighten financial conditions and slow economic activity.
The bank noted that expectations for a Federal Reserve rate cut in June have already fallen sharply as oil prices climbed. Markets previously priced in a near-certain cut, but the probability has now dropped to about 25%.
Bank of America pointed to the last major oil spike for context. During the financial crisis buildup in 2007 and 2008, crude surged from about $70 per barrel to nearly $140. Oil peaked shortly after the European Central Bank raised interest rates, and within months, the financial system began to unravel. Prices eventually collapsed to around $40 per barrel.
The bank argues that the biggest risk from high oil prices today may not be inflation itself but damage to corporate earnings and financial markets. Banks often serve as the transmission point between financial markets and the real economy, and weakness in bank stocks can signal broader economic stress.
Because of that dynamic, Bank of America recommends a cautious approach if oil pushes above $100, suggesting investors take profits rather than chase the rally.
The firm also outlined several related macro trades, including favoring the U.S. dollar above 100 on the DXY index, buying 30-year Treasury yields above 5%, and looking to buy the S&P 500 if it falls below 6,600.
By Julianne Geiger for Oilprice.com
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