Oil Surge to Weigh on Stocks, Consumer Spending
NEW YORK ( TheStreet) -- The month of July has already seen a surge in oil prices, with markets trading above $102 per barrel. This is the highest level in more than a year, driven largely by conflicts in Egypt, signs of rising summer demand in the U.S., and by falling supply stockpiles. Since June 24, oil has gained nearly $10, and, at this stage, it is important to consider the potential effects this rally will have on consumer spending, stock values and the economy as a whole. Ultimately, with oil trading at its current levels, this year's rally in stocks meets another point of vulnerability.
Conflicts in Egypt are creating dual negatives for the market: adding an element of general uncertainty and raising concerns over oil supply disruptions for exports travelling through the Suez Canal. This will continue, at least for the short term, as the ultimate effects of President Mohammed Morsi's resignation ripple through the market.
So, while these events have done little to directly impact the global economy, their effects on sentiment and risk-aversion are clear. Egypt is not an oil producing country -- but it does control the Suez Canal, and as long as oil remains above the psychological $100 level, stocks will face headwinds as well. Roughly 2.5 million barrels of oil are sent through the Suez Canal (using the SUMED pipeline) each day, so political and military conflicts in these areas have the tendency to create additional volatility in energy markets.
On the positive side, the recent unrest in Egypt has failed to move markets as much as the "Arab Spring" of 2011, where massive street demonstrations and political turmoil propelled oil much more forcefully toward new long term highs. Similar events this year have not jarred the market as much, as these events are less surprising and the probability of supply disruptions is more predictable. But if oil prices remain elevated, the broader effects on consumer spending will become clear, weighing on consumer purchases of goods and services (which make up about 70% of the economy).
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