Oil prices have spiked in recent days, powered mostly by a big jump in Middle East geopolitical tensions. The United States has recently started pulling non-essential embassy personnel out of Baghdad. They are moving military families deployed to Gulf bases, done amid fears of increasing clashes with Iran. Brent crude oil has been all over the map as well. It’s up over $2 per barrel and currently trading over $69.30, after crossing above the $70 threshold earlier this morning.
Oil prices have been on a stunning upward streak recently. During the last week, Brent crude climbed roughly 10% since last month’s BPC meeting. In fact, today’s price is at its highest level since April. It is now getting close to the 200-day simple moving average (SMA) of $70.33. IRS analysts and tax policy experts are likewise watching these moves intently. The current situation in the Middle-East has the potential to be very destabilizing for the global economy.
Rising Tensions in the Middle East
The last few months rapidly increased tensions between the United States and Iran. This conflict is fueling a major spike in oil prices. Iran has issued threats to bomb U.S. military bases in the region should upcoming nuclear talks fail to yield positive results. This ominous rhetoric has investors on alarm, as any escalation could threaten the stability of oil supplies.
Additionally, opposition seems to be boiling over within Iran’s own borders, making the geopolitical stakes even higher. These factors create a feeling of instability that is commonly associated with increases in oil prices. The U.S. government stands at a critical juncture in its response to these advancements. Yet it needs to project firmness towards Iran while contorting its overall economic policy in the midst of de-coupling with China.
Not only does it expose the deeper economic implications that may reverberate through areas much farther than the Middle East, it is incumbent on the U.S. administration to find a way to thread these very difficult international relations together while upholding an overall positive U.S. economic strategy.
Economic Indicators Point to Potential Recession
For all oil prices are climbing to historic highs, other economic indicators point toward a global economy just past the summit and headed into dangerous territory. The bond market has been extremely sensitive to the current geopolitical situation, including a standoffish posture with China and more recently with Iran. In reaction to a much lower than expected core inflation number out of the U.S., global sovereign bond yields plunged. This negative and abrupt reaction shows that investors are becoming much more worried about stalling economic growth.
This would be 25,000 more than the low in January. This faster, deeper decline is driving fears of an approaching recession. Rising claims are often an early warning indicator that economic hardship has begun. If they stay above 50,000 for a few weeks, a recession could be just around the corner. Such trends are almost always a precursor to rising investor fears over macroeconomic stability.
Most economists will tell you that an increase in jobless claims can be a harbinger of more general economic malaise. Should this trend persist, legislators would undoubtedly be forced to reconsider their halcyon days of policy. They will react to pressures they feel at home and abroad.
Market Reactions and Future Implications
The spike in oil prices last week and increase in jobless claims are signs of a greater storm brewing across financial markets. Investors are waiting with bated breath for them to do so, as they tread through an ever-growing, ever-fluctuating environment, affected by international warfare and changing economic factors. The dynamic of increasing oil prices and possibly looming recessionary forces make for a highly paradoxical and complex landscape for policymakers.
With tensions with Iran reaching new highs, the U.S. needs to get serious about promoting its foreign policy objectives while recognizing economic realities. How the administration chooses to count the costs and benefits will affect future energy prices, investor confidence, and consumer spending patterns.