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History Suggests Higher Oil = Risk Off: Analyst

With oil prices surging overnight on fears over the political crisis in Libya and the wider Middle East, one analyst has warned that major spikes in oil prices are likely to lead to bad news for the economy and risky assets.

"Higher oil is by definition going to be a drag on spending and the economy and the uncertainty the Middle East crisis is creating is bad news for sentiment," Simon Derrick, head of currency research at BNY Mellon, said.

"In 1973 a major oil spike hit growth and the market even before war broke out in the Middle East. In 2008, before the Lehman crisis it was the jump in crude prices to $147 (that) was the catalyst for problems in the economy long before the crisis in Wall Street," Derrick added.

What Price Means Trouble?

It is unclear what oil price would see investors take fright and exit the risk-on trade but, according to Derrick, the market is clearly very worried by events in the Middle East.

"The pace of moves is critical. In January we where only talking about Tunisia, now only six Middle Eastern nations have not had reports of civil unrest," he said.

"This is not a supply issue but a political issue. Two out of three leaders in Northern Africa who have been in power for over a generation are now gone and the question of who will replace them raises concerns," Derrick added.

The Flight to Safety

Derrick says the Canadian dollar is the place to be if oil prices remain high.

"Investors should look for safe havens and the Canadian dollar is clearly a currency that does well when oil prices are high," he said.

"In 1973 the Canadian dollar outperformed the US dollar and in 2007 it hit an all-time high against the greenback. With the world's second-largest reserves including the tar sands, the Canadian the dollar is ideally placed with oil around $100," Derrick explained.

Contact Europe: Economy

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