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Consumers and markets may be in for wild ride as oil prices rise

“Anytime there’s conflict on this potential scale, markets just don’t have an edge," one expert said. 
Image: Traders, Wall street
The S&P 500 lost 44 points, leaving the index down more than 10 percent since early January.Spencer Platt / Getty Images

It could be another bumpy week on Wall Street, as tensions between Russia and the West over Ukraine threaten to push oil prices into triple digits and consumers, who are already facing the highest inflation in 40 years, to the brink. 

Or maybe not. “There’s no forecastable outcomes here,” said Eric Freedman, chief investment officer at U.S. Bank Wealth Management. “Anytime there’s conflict on this potential scale, markets just don’t have an edge.” 

All three major stock indices sold off on Tuesday, as Germany halted certification of the Nord Stream 2 pipeline and Western nations, including the United States, announced sanctions against Russia. 

The Dow Jones Industrial Average closed down 482 points. The S&P 500 lost 44 points, leaving the index down more than 10 percent since early January, and officially in correction territory. 

Oil prices continued to climb. Brent crude — a key oil-price benchmark — came within 50 cents of $100 a barrel, before dropping modestly. Many experts now believe crude could easily top $100 a barrel, with $125 in the realm of possibility. 

“This certainly bolsters the case that $4 a gallon gas is only a matter of time,” said Patrick DeHaan, head of petroleum analysis at As of Monday, GasBuddy data showed a national average of $3.52 a gallon, up roughly 21 cents from a month ago and nearly 90 cents over the past year. 

The biggest threat to energy prices is that Russia, which produces roughly 10 percent of the global oil supply, will respond to sanctions by constraining its exports, which could trigger a wild ride for the oil sector, the markets, and consumers.

And higher prices at the pump won’t be the worst of it. Pricier oil can drive up costs in nearly every category from food to plastics, and along every step of the supply chain, from the manufacture and packaging of goods to shipping them to stores or people’s homes. 

“This is going to contribute further to inflationary pressure,” said Jeffrey Schott, a senior fellow at the Peterson Institute for International Economics. And the  prospect of inflation running both hotter and longer comes as rising prices are already weighing on consumers. Consumer confidence hit a five-month low in February, according to data released Tuesday by The Conference Board.

Thanks to higher personal savings, many consumers have been able to absorb higher prices — but as the rate of inflation starts to eclipse wage gains, more Americans will lose ground. 

“It hasn’t had an impact detrimentally on consumer spending, but to the extent that it keeps going on, it definitely crimps on a day-to-day basis,”  said Tom Martin, senior portfolio manager at Globalt Investments. “Their margin for error is being shrunk.”

The erosion of that buffer worries Wall Street, which adds to market volatility, as it suggests that policymakers could raise interest rates higher and faster than expected. “The biggest market overhang right now is actually the Federal Reserve’s transition from a lot of accommodation to more of a restrictive set of potential monetary policies,” Freedman said.

“We’re on a long- term trajectory to higher rates,” said Dean Smith, chief strategist and portfolio manager at FolioBeyond. Consumer spending is the biggest driver of the national economy, and  and said Smith,: “That will affect consumer spending, no question about it.”