When will the surge in oil prices trigger a real crisis? History reveals three major signals

``` The situation in Iran is turbulent, causing oil prices to surge for several consecutive days. The market is once again highly tense, with close attention on whether the impact will further spread. According to ZF Trading Desk, Henry Allen, macro strategist at Deutsche Bank, pointed out in his latest research report: simply based on the current rise in oil prices, there has never been enough to trigger a sustained market crisis in history. For oil price shocks to truly make the S&P 500 fall more than 15%, history without exception requires one of the following three conditions to be met: 1. A sharp and sustained surge in oil prices: an increase of at least 50% to 100%, lasting for several months; 2. Substantial damage to the macroeconomy: the oil price shock is enough to push an already slowing economy into recession; 3. The central bank is forced to turn hawkish: inflationary pressures force the Fed or other major central banks to sharply raise interest rates. Currently, none of the above three conditions have been triggered. Deutsche Bank clearly indicates that this is a dynamically evolving situation, and the next few days to weeks will be a key window period. Current Oil Price Shock Belongs to the “Lower-Medium” Level On March 2, Brent crude oil rose by 7.3% in a single day, marking the largest daily gain since March 2022. European bonds and stock markets fell accordingly. However, when this fluctuation is viewed from a longer historical perspective, the conclusion is quite different: - The absolute level of WTI oil prices is still below the 2024 annual average ($75.8/barrel), and far from the price levels during major historical crises; since 1990, there have been 55 occurrences of daily gains at this magnitude, which is not a rare event; - Although European natural gas prices also recorded the largest daily gain since 2022, the absolute price level is still far below the 2022 peak, and not even back to the 2025 high. - The S&P 500 actually rose slightly on Monday, falling only 1.4% from its historical high; this stands in stark contrast to the market’s rapid shift into a bear market when the Russia-Ukraine conflict erupted in 2022. (Chart) Deutsche Bank concludes that the current oil price fluctuation is “lower-medium” in historical terms and does not yet meet the threshold for triggering systemic risk. The Shared Patterns of Four Oil-Price-Induced Crises in History Deutsche Bank studied all major cases in which oil price shocks evolved into S&P 500 drawdowns exceeding 15%, and distilled three common characteristics: Condition One: Oil prices surged at least 50% to 100% and remained high for several months - 1973 Oil Crisis: OAPEC imposed an oil embargo, prices nearly quadrupled, and the US and UK fell into recession. The S&P 500 plunged over 40% within a year. - 1979 Iranian Revolution & Iran-Iraq War: Oil prices more than doubled again, Iranian production dropped sharply, and supply shocks persisted. - 1990 Gulf War: After Iraq invaded Kuwait, oil prices more than doubled, and the S&P 500 fell 19.9% from July to October 1990. - 2022 Russia-Ukraine Conflict: Brent crude soared from about $80/barrel at the beginning of the year to the closing price of $128/barrel on March 8, a rise of about 60%. Condition Two: The macroeconomy is substantially affected, with significant increase in recession risk Oil price shocks do not exist in isolation. In 1990, the Fed had already completed a rate hike cycle from 1988 to 1989 and economic growth was already slowing. The oil price shock then became the last straw, pushing the US into recession. The report emphasizes that there is still no substantial deterioration at the data level— even if there was a brief recession scare in the summer of 2024, the market also quickly stabilized. Condition Three: Central banks are forced to turn hawkish and sharply raise interest rates to combat inflation In 1979, then Fed Chairman Paul Volcker launched an unprecedented monetary tightening cycle. Combined with the oil shock, the US fell into recession in early 1980, and the S&P 500 fell another 17%. In 2022, it was precisely the Fed’s aggressive rate hike cycle resonating with the oil shock that led to the S&P 500’s first post-financial-crisis three straight quarters of decline. Currently, market pricing for Fed or ECB rate hikes is still considered "tail risk" rather than baseline scenario, far below the hawkishness of the above historical cases. ~~~~~~~~~~~~~~~~~~~~~~~~ The above wonderful content comes from ZF Trading Desk. For more detailed interpretations, including live commentary and frontline research, please join [ZF Trading Desk • Annual Membership] Risk Warnings and Disclaimer The market has risks, and investments should be made cautiously. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial conditions, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their particular circumstances. Investing based on this is at your own risk. ```