To that last point, whether you’re driving, flying or cooling off your home in the late-summer heat, chances are
you’re feeling some of the sting of higher fuel costs. Today, we dig into what’s behind the moves and whether they’re cause for concern.

Spotlight: Gas prices are going up: Should you be worried?

The price of oil is at its highest of the year, popping above $90 per barrel yesterday for the first time since November 2022. With oil up over +30% just since June, this has also pushed the prices of distillates such as gasoline and diesel up along with it. The average price of regular U.S. gasoline is $3.85 per gallon at the moment, up from around $3.50 just a few months ago.

First things first: What’s behind the moves?

Oil prices started to sink at the start of the summer. So to boost prices and support the market, OPEC+ (an organization of some of the largest oil-producing nations) swooped in with production cuts. Saudi Arabia and Russia have been at the center of the moves, extending their planned production cuts through December. Together, the broader OPEC+ group is now holding back 4 million barrels of crude per day – the largest production cut outside of a recession over the last two decades. So, with less supply to go around to meet still red-hot demand, prices have been on a tear higher.

Could it get worse?

There’s always the chance of short-term spikes. But, unless we see an unexpected geopolitical event, we think it would be hard to see prices over $100/barrel (which would look more eyebrow-raising). It comes back down to supply and demand:

• Supply: Higher oil prices could tempt other producers into action. It looks like independent producers in both the United States and Canada could boost supply by at least 500,000 barrels/day in the next few months. As U. S. - Iran relations thaw, Iran has also been sending more oil to the market.
• Demand: Despite growth in China slowing its roll, global demand for energy has held up at record levels. But, as the heat dies down and folks phase out their summer travel, demand should cool. Climate patterns should help, too. El Niño (a band of warm water that forms in the central and eastern Pacific Ocean) often leads to warmer winter weather in the United States. The last time we saw an El Niño winter, oil demand fell more than 15%.

That’s all to say, risks remain, but we think oil prices will ease (likely towards the mid-$80s) as more supply comes online and demand slows. This should help temper fuel costs in the coming months.

What does it all mean?

There are two big worries:

• Higher oil prices will finally crack the consumer.
• Higher oil prices will undo the progress that central banks have made on inflation.

Higher oil prices will finally crack the consumer. The worry goes that pain at the pump is coming at the worst time, especially for less affluent households. Most consumers don’t have any pandemic-era savings left, more people seem to be turning to debt to keep up their purchases and student loan payments are about to restart.

Those are real challenges, and more people may feel the pinch in their pocketbooks in the months ahead, but we don’t think it’s enough to derail an otherwise strong consumer.

For one, most who want a job have one. The labor market is strong, and there are still 1.4 job openings available for every unemployed person. This means most consumers have reason to keep spending. And even as more people use debt to finance their purchases, the overall ratio of household debt-to-income still looks healthy.

It’s also worth noting that energy prices may matter less than they used to. In 1974, consumers spent almost 10% of their wallet share on energy goods and services. Today, it’s around 4%. And excluding supervisors, the average U.S. worker can buy 7.5 gallons of gas per hour worked, more than they could for most of 2005 - 2014.

Higher oil prices will undo the progress that central banks have made on inflation. Higher gas prices may add pressure to the next few inflation prints. But, over the balance of the next year, we think inflation will keep cooling. More signs than not point to easing oil prices, and rent prices and other core services (which have been the stickiest drivers of inflation) are still easing, with ample room for progress. That should also help support incomes.

We don’t think these dynamics will change anything for the Federal Reserve at its meeting next week. We’d still take the over that policymakers go on pause, but with a caveat that markets are betting on a 50% chance of one more hike by the end of the year. Either way, the conversation seems to have decidedly shifted from “how high” the Fed should hike rates to “how long” it will hold there. This means the key thing to watch next week will be the Fed’s view on the path of policy in 2024 (its “dot plot”), which could give us a sense for the timing and pace of any rate cuts.

Investment considerations: There’s always going to be something

The market stratosphere is full of reasons not to invest. But through all the challenges and risks, and even through periods of heightened optimism, investors who have stayed the course have generally benefitted from growth, innovation and progress.

To us, a 60/40 portfolio of stocks and bonds remains one of the best starting points, offering the potential for growth and income. And to add an additional element of diversification, alternatives such as real assets can help protect against risks around inflation.

Your J.P. Morgan team is here to discuss what these dynamics mean for you and your portfolio.>

All market data from FactSet and Bloomberg Finance L.P., 9/14/23.

DISCLOSURES

Small capitalization companies typically carry more risk than well-established "blue-chip" companies since smaller companies can carry a higher degree of market volatility than most large cap and/or blue-chip companies.

International investments may not be suitable for all investors. International investing involves a greater degree of risk and increased volatility. Changes in currency exchange rates and differences in accounting and taxation policies outside the U.S. can raise or lower returns. Some overseas markets may not be as politically and economically stable as the United States and other nations. Investments in international markets can be more volatile.

Diversification does not ensure a profit or protect against loss.

The Standard and Poor’s 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Bloomberg Eco Surprise Index shows the degree to which economic analysts under- or over-estimate the trends in the business cycle. The surprise element is defined as the percentage difference between analyst forecasts and the published value of economic data releases.

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The MSCI World Index is a broad global developed markets equity benchmark designed to support: Asset allocation: Consistent, broad representation of the performance of developed equity markets worldwide, without home bias.

The Bloomberg Aggregate Bond Index or "the Agg" is a broad-based fixed-income index used by bond traders and the managers of mutual funds and exchange-traded funds (ETFs) as a benchmark to measure their relative performance.

The NYSE FANG+ Index is an equal-dollar weighted index designed to represent a segment of the technology and consumer discretionary sectors consisting of highly-traded growth stocks of technology and tech-enabled companies such as Facebook, Apple, Amazon, Netflix, and Alphabet's Google.

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