Market Insider

JP Morgan's stock guru says oil won't hurt stocks until it hits $80

Key Points
  • JP Morgan's chief quant Marko Kolanovic said rising oil prices should not hurt the stock market until it reaches $80 to $85 per barrel.
  • Kolanovic said the rise in oil prices should be helpful in keeping the "value" trade going in energy stocks.
  • Rising geopolitical tensions in the Middle East could push China and the U.S. to a trade agreement.
JPMorgan's Marko Kolanovic.
Crystal Mercedes | CNBC

J.P. Morgan's chief quant says oil prices won't hurt stock prices until they hit the $80 to $85 per barrel range.

Marko Kolanovic, global head of macro quantitative and derivatives strategy, said when oil prices are stable, oil correlates positively with the S&P 500, but when there are large price increases, the correlation weakens and becomes negative.

West Texas Intermediate futures settled at $62.90 per barrel, up 14.8% in afternoon trading following the attack Saturday on Saudi Aramco facilities, knocking out more than half of Saudi Arabia's oil production. Oil had its best day since December, 2008.

In a note, Kolanovic said higher oil prices can hurt consumer spending activity, but there are also positives including higher energy sector profits, reduced worries about high-yield energy debt, and improved employment in the industry.

Kolanovic, who sees a positive stock market this year, said rising geopolitical risk could also be a factor that pushes China and the U.S. to a trade agreement.

He also sees both oil and natural gas prices moving higher, and that should drive energy stocks higher, accelerating a trend into value stocks.

"Oil futures have been trading in a tight range below 50 100 and 200d moving average, and below 12 month momentum term and hence shorted by trend followers. With today's move, spot has broken through all the averages and there should be significant short covering ahead, " he wrote.

He said there is a similar outlook for natural gas futures, which also broke 50-day and 100-day moving averages and are sitting just below the 200-day. Natural gas futures were at $2.68, up 2.6% Monday to a five-month high.