By Lewis Krauskopf

NEW YORK, (Reuters) – The U.S. stock exchange is already at risk from a hawkish Federal Reserve, a conflict with Russia, and now has another concern: rising oil prices.

Prices are now at $91 per barrel, up 40% from Dec. 1, and have reached their highest point since 2014. Global benchmark oil, also on the rise, is at its highest level in 7 years.

Markets may be concerned by rapidly increasing oil prices. This is because they can cloud the economy and increase costs for both businesses as well as consumers. Inflation is already on the rise and higher crude oil could increase it further. This raises concerns that the Fed may need to tighten its monetary policy in order to reduce consumer prices.

“The stock market would really run into trouble if we went north of $125 per barrel and stayed there for a while because that would overheat high levels of inflation,” said Peter Cardillo, chief market economist at Spartan Capital Securities. That would mean that the Fed must be more aggressive. This would certainly not be a good scenario for stock market.

Rising tensions between Russia – one of the world’s largest oil producers – and Ukraine recently helped drive the rally in oil, which had been supported by a recovery in demand from the coronavirus pandemic.

Capital Economics analysts earlier this week stated that oil prices and crude would spike if Ukraine conflict escalated, “even though they fall back relatively fast as the dust settles.”

Inflation in the United States rose due to higher oil prices. However, overall consumer prices increased by 7.5% last year, but the energy component of the index rose 27%.

Oxford Economics’ analysts estimate that each “sustained $10 rise in the oil price per barrel” adds approximately 0.3 percentage points annually to the overall consumer price Index.

In emailed comments, Kathy Bostjancic (chief U.S. economic economist at Oxford Economics) stated that higher oil prices have the greatest impact on consumers price inflation.

This year, the benchmark fell by over 8% while the yield on the 10-year benchmark Treasury note rose 40 basis points to more than 1.9%. Refinitiv’s Fedwatch tool shows that investors expect the Fed funds rate, which is currently near zero, to increase to over 1.50% by 2022.

CONSUMER SPENDING IN IMPACT

Businesses and drivers are already paying more for crude oil. Automobile group AAA reported earlier this week that the U.S. national gasoline average was at $3.48 per gallon. That’s up 18cs from one month before and 98cs from one year ago.

Investors monitor trends regarding consumers as rising gasoline prices impact on U.S. business activity. Over two thirds of U.S. GDP is accounted for by consumer spending. The data on Wednesday revealed that U.S. Retail Sales increased the most in 10 Months in January. But, consumer sentiment in February was lower than it had been in over a decade.

According to Michael Arone (chief investment strategist), “There is a risk that gas prices will rise, which could lead to less discretionary spending by consumers.” State Street (NYSE:) Global Advisors.

Investors are gauging the effect of higher oil on companies’ earnings. Typically, rising oil prices are estimated to lift overall S&P 500 earnings by about $1 per share for every $5 increase in the price of crude, according to David Bianco, Americas chief investment officer at DWS Group, with benefits to energy firms outweighing the drag on earnings of airlines and other companies potentially hurt by higher crude costs. That amounts to about 0.4% of total S&P 500 earnings expected for 2022.

The S&P 500 energy sector is up 22% so far in 2022 while fund managers in the latest BofA Global Research survey reported their highest allocation to energy stocks since March 2012.

Investors said that oil prices are at their highest level in seven years, while energy stocks make up less than 10% of the market. However, this could lead to inflation fears if crude costs keep rising.

“Higher oil prices, without a recession, raise S&P profits,” Bianco said. “But not as much as it used to and you definitely don’t want this happening when the Fed is fighting inflation.”