How Oil Impacts Inflation, the Fed and Markets

This is Brad Barrie, Chief Investment Officer & Portfolio Manager with Dynamic Wealth Group. Welcome to this market and economic update. In this video, we’ll discuss recent trends in oil prices and how they might impact markets and the economy.

This is an important topic right now because markets have been jittery the past few weeks. The S&P 500 has now experienced its first 5% pullback this year due to the Fed, a decline in technology stocks, and heightened tensions in the Middle East.

It’s important for investors to remember that short-term market declines are both natural and expected. Rather than focusing on day-to-day market movements, it’s far more important for investors to understand the bigger-picture trends.

Over the next few minutes, we’ll discuss how geopolitics and oil prices might impact these trends over the next several months. If you are watching this on our YouTube Channel, be sure to subscribe and turn on notifications, so you don’t miss any future videos. Also be sure to hit the like button.

First, oil prices have risen about 8% so far this year but they are still well below their recent peaks. That occurred in early 2022 when Russia invaded Ukraine and oil prices jumped above $120 per barrel.

That episode is important because higher energy prices drove inflation as well. This was one reason the Fed had to act as swiftly as it did in hiking interest rates to prevent prices across the economy from increasing further.

Higher energy prices, including gasoline prices at the pump nearing $5, was one reason many economists feared that a recession would occur.

Thus, oil prices are a way in which global events can impact markets. Investors are especially sensitive to this today because of the effects oil can have on inflation and Fed policy.

Second, a key difference between today’s environment and the past is that the U.S. is the largest producer of both oil and gas in the world. In theory, this helps to insulate the U.S. somewhat from global events, at least relative to historical periods such as the 1970s.

Specifically, this chart shows that U.S. oil production has fully recovered from the pandemic and now exceeds 13 million barrels per day.
That said, the U.S. is still dependent on global energy markets. Not only does the U.S. still import foreign oil due to differences in the type and quality of oil here and abroad, but oil is a global commodity so price fluctuations can impact U.S. consumers as well.

All in all, higher oil prices can certainly impact inflation as they have so far this year. Greater uncertainty around inflation also impacts the timing and path of Fed rate cuts which the market is highly sensitive to.

Finally, these factors not only affect the broad economic outlook but impact investment portfolios as well. Specifically, this chart shows that the energy sector is now the best performing group in the S&P 500 this year, especially with the decline among technology stocks.

What is interesting is that the energy sector has behaved quite differently from the rest of the market over the past several years. From 2014 to 2020, energy was among the worst performing groups due to overproduction and a collapse in oil prices.

However, the energy sector surged in 2021 and 2022 as the global economy bounced back.

While the past is no guarantee of the future, and regular followers know that we are big believers in preparing for the future, and not attempting to predict the future, this does shows that the energy sector is an important component of a diversified portfolio that can help balance risk. Investors should continue to stay diversified, with portfolios that include different asset classes (including broad exposures to all sectors of the stock market), but also diversify among different approaches (Strategic, Tactical & Alternative).

We hope you found these insights valuable. If you are a financial advisor and would like more information on our Multi-Dimensional Approach towards asset management, please visit our website, or reach out directly by emailing us at: If you are an individual investor, we are happy to address any questions you may have and put you in touch with a qualified advisor if so desired. Until next time, take care everyone, and make smart, logical & fact-based financial decisions.

Clearnomics and Dynamic Wealth Group, LLC are not affiliated entities. No part of this should be taken as investment advice. Consult your financial advisor for specific investment recommendations tailored to your specific situation.
Dynamic Wealth Group (“Dynamic”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Dynamic by the SEC, nor does it indicate that Dynamic has attained a particular level of skill or ability. This material prepared by Dynamic is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Opinions expressed by Dynamic are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Dynamic, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.
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