If oil where to hit 2008 record highs there would be a significant impact on European growth but if the price of crude where to hit $200 in a worst case scenario stock markets would fall sharply, according to Societe Generale.
"European equities could give up close to 30 percent on a worst-case scenario," Claudia Panseri, the head of equity strategy at Societe Generale, wrote in a research note.
"While we expect European corporate earnings to grow by about 15.4 percent in 2011 and place the DJ Euro Stoxx at 3,150 by year-end, a surge in oil prices to $150 a barrel would drive European corporate earnings growth down to 5 percent and equities would give up almost 15 percent from current levels," Panseri added.
What is not clear to Panseri and her team is whether hitting 2008 highs would actually see Europe go into recession "given the extraordinary momentum in global growth and exceptionally loose monetary conditions currently throughout the world."
"What seems to matter more is (the) pace of any potential surge in oil prices, the trend in other commodity prices and the relative level of the commodity bill to revenues," she wrote.
Losers and Winners
Having analyzed the two oil crisis of the 1970s, the first Persian Gulf war and the 2008 jump in prices to record highs, Societe Generale has found that regardless of the nature of the shock, fast rising oil is bad for stocks if the market had made gains before the oil shock.
"During the second oil crisis, the market was down just two percent. This can be attributed to the very low valuation levels prevailing at that time. However, during the first half of 2008, the market fell more than 14 percent. Rising oil prices, combined with elevated valuations and a nascent financial crisis formed a pretty toxic cocktail combination," Panseri said.
Airlines, auto makers and luxury goods stocks would be the big losers if oil moves significantly higher from here, according to Panseri, who says there would of course be some big winners.
"Unsurprisingly, the energy and basic materials sectors consistently outperform. On average, they beat the market by 14.5 percent and 12.5 percent," she pointed out.
"At the more defensive end of the spectrum, Tobacco and Food Retail both outperform in high-single digits," Panseri added.