Brent crude oil prices have moved back through the $100 a barrel mark, suggesting that central banks may keep interest rates higher for longer or consider further rate rises if inflationary pressures intensify. This has major implications for personal finances, corporate profits and financial markets.
Oil price trends have played a key role in recent bond market troubles, with bond yields jumping in the face of renewed tensions between the US and Iran. The Middle East conflict has flared up again after a brief respite earlier in the summer, causing the market to worry about oil supplies and refining constraints.
Oil prices and financial markets are closely linked – oil is a vital fuel for the global economy. Movements in oil prices can shape business and consumer confidence, influence spending decisions and contribute towards inflation, ultimately affecting corporate profits, economic growth and interest rates.
It’s not as simple as low oil prices are good, and high oil prices are bad. The former can indicate sluggish economic activity if oil demand is weak, while the latter can be the result of strong economic growth and oil demand exceeding supply.
What’s happening now?
Oil has pushed above $90 a barrel on three occasions since mid-July as Iran war peace talks broke down and hostilities escalated again. The trend has accelerated since the start of September with Brent crude trading at a tick over $100 per barrel as we write.
The black stuff has rapidly increased in price for the same reason as why it went from $71 in late February to trade well above $100 in the intervening period up to June – worries about a disruption to supplies.
It’s not uncommon to see oil prices move around, but investors don’t like it when they suddenly race higher and stay put.
How does the stock market behave when oil is high?
History suggests investors should be alert rather than alarmed when oil trades above $90 per barrel. The impact on markets depends not only on the oil price itself, but also on why it is rising and how long it remains elevated.
Over the past 20 years, the global stock market (as measured by the FTSE All World index) fell in two of the four occasions when oil prices traded at $90 or higher for more than two months in a row.
The biggest drop was a 30.3% decline between October 2007 and October 2008 as the global financial crisis unfolded, and the world braced itself for an economic shock. The other occurrence was in 2022 when Russia invaded Ukraine and sanctions led to major oil supply disruptions.
The two other examples are interesting. The global stock market advanced 26.4% in the period between December 2010 and October 2014 when oil remained stubbornly higher than $90 per barrel for nearly four years, peaking at $126 in March 2012.
That oil price spike was caused by strong demand, conflicts and political unrest in the Middle East, and producers’ cartel Organization of the Petroleum Exporting Countries (OPEC) changing management style. The latter eventually led to a policy shift that saw OPEC members flood the market with oil to regain market share lost to US producers, triggering a big decline in the commodity price.
The onset of the Iran war earlier this year saw the FTSE All World index rise 7.8% between March and June when oil traded above $90 for a three-month stint.
In both examples, markets didn’t move up in a straight line. There were wobbles along the way, but investors are forward-looking and price in what they think will happen next. In both cases, investors eventually took the view oil prices would come down and inflationary pressures would ease.
Why isn’t oil now back up to $120?
Logic suggests the resurgence of fighting in the Iran war means oil should trade around or close to the $120 levels seen when the conflict began. There is good reason why it isn’t quite that high.
First, some oil is managing to flow out of the region, so supply hasn’t stopped completely. Second, refining capacity has been constrained by damage to facilities in the Middle East and Ukrainian drone strikes on Russian refineries.
Theoretically, that should have dampened demand for crude as many buyers won’t want oil they cannot refine.
Crack spreads tell a different story. The global 3-2-1 crack spread, which measures the difference in price between three barrels of crude, against two of petrol and one of heating oil, is up more than three-fold in 2026 to date.
What happens if oil stays higher for longer?
Limited refining capacity and shortages of finished fuels are adding to the pressure on households and businesses, with diesel prices particularly high.
It’s not just about filling up the car at the forecourt. Rising fuel costs make transporting goods more expensive, and businesses are likely to pass these increases on to consumers. Agriculture and construction are among the sectors most at risk.
The bond market is increasingly focused on the challenges ahead and the possibility that renewed inflationary pressures could keep interest rates elevated and weigh on economic activity. That’s why bond yields have risen in recent weeks.
The stock market appears to be less concerned, at least for now. It has one eye on these issues but continues to be resilient thanks to ongoing excitement around AI. If the oil-related issues persist, the stock market might have no choice but to have both eyes open.
Central banks are watching events closely and the dominoes look primed to fall. Traders are pricing in three interest rate hikes over the next six months in both the UK and the US.
The CME (Chicago Mercantile Exchange) FedWatch tool shows a 60.5% probability of a US rate hike at the Fed’s meeting next week, while data from the London Stock Exchange Group (LSEG) suggests we could see a UK rate hike in November.
If we do get a market pullback, it is important not to lose your cool and rush to sell everything. There is merit in sticking with a regular investing plan. If markets are lower, your money will go further when you buy shares or funds. Markets can rebound faster than you expect and staying invested through a downturn means you fully benefit from any recovery.
Dan Coatsworth: Head of Markets
Dan Coatsworth is AJ Bell's Head of Markets. Dan has been with the company since December 2012 and has more than 18 years' experience in the industry, following the markets and all things investing. He...
