Oil Price Spike Risks Wider Market Swings Amid Inflation Fears

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A spike in oil prices risks fanning wider moves across asset classes should inflation-sensitive investors believe the crude market will tighten further after OPEC+ failed to agree on a deal to increase production.

The surprise breakdown in talks means tighter supply conditions for crude and upward pressure on prices -- at least in the near term -- adding fuel to the wider inflationary concern that’s challenged central banks and roiled risk assets. Brent crude futures rose above $77 for the first time since 2018 this week, sending global energy shares higher.

Benchmark 10-year Treasury yields ticked two basis points higher Tuesday, after reopening from a holiday, and the yield curve steepened.

Oil Price Spike Risks Wider Market Swings Amid Inflation Fears

“The crude oil rally neatly encapsulates the broader reflation narrative,” said Ilya Spivak, head of greater Asia at DailyFX. A renewed surge could amplify the Federal Reserve’s sense of urgency to tighten monetary policy, leading to a “broad risk-off turn that pulls down shares, oil and other sentiment-sensitive assets,” he said.

After several days of tense talks, OPEC and its allies abandoned their Monday meeting. A disagreement over how to measure production cuts upended a tentative deal to boost output and swiftly devolved into an unusually personal and public spat between Saudi Arabia and the UAE.

Oil Price Spike Risks Wider Market Swings Amid Inflation Fears

Still, the relatively modest reaction in other markets so far suggest investors are also cautious over the longer-term implications of the OPEC+ crisis. If the UAE were to leave the cartel, there is a risk producers would ramp up supply and ultimately send crude oil lower.

©2021 Bloomberg L.P.

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