The Oil Market’s Next Big Test: War, Inflation and the Midterms

Geopolitical tensions, oil market volatility, inflation, and the approaching midterm elections are creating a complex outlook for energy markets, consumers, and investors. Joining us now to break it all down is Rob Schroeder, Washington Bureau Chief at MarketWatch. Thank you so much for being here today, Rob. Thank you. Of course, we have so much to get to. This is a lot going on here. So many different topics all playing in to what is happening in the economy right now. How are geopolitical tensions and the Iran conflict really driving volatility in oil and energy markets at this time with just so much uncertainty? Yeah, 100 percent, Justine, exactly as you say. The markets, the economy, Washington politicians all sort of, you know, hanging on every development really that comes out of the Middle East with Iran, the U.S., the Strait of Hormuz, and so on. Interestingly, inflation, you know, keeps running above the Fed's target here, even though energy prices did fall in July. But year over year, you know, they are up and they are elevated, of course, since a year ago, since before the Iran conflict started. So there's certainly a lot of pressure on markets, on the economy, and as I said, on politicians. And right now, it doesn't seem to be abating, with the conflict still stuck in a holding pattern, if you could call it that. It does. Yeah, it does seem to be just that, as you're saying there with news one day that says one thing and news the next day that says another. So we really don't know what's going on there. But with all that uncertainty and again, those elevated numbers, as you're saying, how much could this higher energy cost really complicate the Federal Reserve's outlook if we head into the rest of this year? Yeah, absolutely. As I mentioned, inflation is still, in fact, running above the Fed's target of 2%. And there are more reports to come later this month, particularly what's known as the PCE report. That one, the Fed looks at a little bit closer. After the latest CPI report, it didn't really solve anything in terms of will the Fed move at its next meeting? Will it hike rates to contain inflation? They need more to look at. And as is their tradition, they're data dependent. So we'll have a few more of those. We also have new Chairman Warsh's speech coming up soon, later this month, at the Fed's meeting in Jackson Hole, Wyoming. That's always very carefully scrutinized for what sort of policy moves they may be making. But right now, a rate hike next month at the September meeting is not a sure thing. We just have to kind of wait and see what happens next with those new inflation meetings. Yeah, we'll have to wait and see those numbers. And Kevin Warsh's speech, as you're saying, thinking about what's happening over there in Iran, as we've been mentioning, so much pressure on lawmakers back here based on what's happening there and how that's affecting our economy here. Talk to us a little bit about that pressure as we head into the midterm elections here. Yeah, absolutely. These topics that we're discussing, inflation, energy prices, affordability, that key word that we've heard here so many times for lawmakers and for our own pocketbooks, is really a potential election killer, if you like, for the party in power. That would be the Republican Party in Washington, as we all know. Now, at the moment, it does seem that Republicans are favored to keep the Senate, whereas Democrats may flip the House. But if the pressure on lawmakers continues, then that outlook could change. Things could look better for Democrats, particularly if we keep seeing gasoline prices elevated the way that they have been. And they're certainly about where they were a year ago. And that is uncomfortable for consumers, obviously, when they go to the pump and they have to make choices about what else to spend their money on. And they do tend to take it out on the party in power. Yeah, it's definitely true. I mean, as people see those higher prices at the pump, it does influence what they're then going to do when it comes to making a choice during an election. Talk to us a little bit about Strategic Petroleum Reserve releases becoming a political tool as well. Again, especially as we head into this election year. Yeah, the SPR, the Strategic Petroleum Reserve, is a pretty fascinating topic right now. Because it's at a 40-year low. And that's something that cannot be underestimated, cannot be taken lightly, because that release from those tanks, really, they're mostly along in the U.S. South, in Texas, Louisiana, and so on, are meant for emergency situations, like hurricanes, disasters, and so on, when there's a supply disruption. But they can be used in times of conflict, and they have been used in times of conflict. So there's a couple schools of thought on these. And once again, it has to do with who's in power, who's out of power. No one likes high gas prices. But it's also unpopular when the party in power tends to be releasing these things, or doing this move, in a way that may be interpreted as gaining political advantage. So it's definitely a political football, as you're describing. But right now, with it at a 40-year low, I think President Trump and the others in the White House, the Energy Department, and so on, may be thinking twice about when to use it and why. Yeah, it definitely seems like there's so many factors at play there going into this. And again, with the midterms coming up, and this kind of political side of things, looking now a little bit more at markets, higher oil prices obviously can benefit energy stocks, but also, as we're talking about, can raise costs for consumers and businesses. So talk to us a little bit about that tension playing out in equity markets right now. Yeah, right now, in equity markets, it's a fascinating story, because stocks are a forward-looking mechanism, if you can call it that. But certainly, the S&P 500 has almost, if you want to say, looked past the Iran war. Year-to-date, the last I checked, the S&P index is up about 14%. Those are pretty healthy returns. And if you're invested in the stock market in a 401k or an IRA, or you have some individual stocks, you're probably feeling pretty good about that. But again, with inflation, the specter of inflation not getting much worse, the good times can only roll for so long. So that's a tension for policymakers at the Federal Reserve. That's a strategic decision for whoever may be managing your money, your portfolio, and how you want to do. But right now, it does seem, with all this volatility, that the market is kind of grinning and bearing it. And investors so far have benefited to the tune of returns, as I said, of about 14% for the year on that broad S&P 500 index. Yeah, I mean, again, so many things that we've been talking to here that all kind of play into each other. One goes up, one goes down. And we're looking at all of that uncertainty and all of those changes as we head into the midterm elections. Lastly, as you're looking forward to what is going to be happening next, what are you most closely watching when it comes to energy prices, politics, the broader economy? What are you most focused on that investors should also really be paying attention to right now? I do think, Justine, that the Iran war is certainly key. President Trump just earlier today said in the TV interview that he is not in a hurry to resolve this and the midterms are not on his mind. I think we should take that comment with a rather large grain of salt. The president doesn't want to lose his congressional majorities and make things like new tax and spending laws all that harder to pass. About a year ago, he had the one big, beautiful bill, which had a number of market-friendly, let's call them, tax changes and the like. So if he wants to do that again, he'll need those majorities or he'll need to find Democrats who will work with him. But if we have a split Congress, which today, if we were to vote, it might be the case, it's going to make that a lot harder. However, markets might like that because it does create gridlock and in gridlock scenarios, sometimes markets tend to perform as well or better than in a unified government scenario. Yeah, it looks like there is a lot for us to keep our eye on here as we move forward. But we really appreciate you being here today, talking us through all of it. Rob Shorter, Washington Bureau Chief at MarketWatch. Thank you so much. My pleasure. Thank you.