Is the Oil Rally Running on Fumes?

POSTED BY: VANCE HOWARD

The markets have traded quite well considering the confrontation in Iran. The day after the initial bombing, the S&P 500 actually opened lower and closed higher for the day. This has worked off a lot of froth and created some opportunities. In most cases, a drop in the market from a dust-up in the Middle East is short-lived and the market finds solid footing in short order. Oil has rallied higher and, we believe it is now way overbought, and parabolic. Accordingly, we think investors should be moving their stops, as any good news in the Middle East will send oil prices lower.

Look at Fabrinet (FN), as it has broken out of a cup-and-handle pattern and has pulled back into a buy zone.

It goes without saying that the U.S. economic impact from the war with Iran will depend on the war’s duration and scope. A short conflict, with limited damage to regional oil infrastructure and global oil supply and logistics, is likely to have a negligible and fleeting impact on growth and inflation. A prolonged conflict of more than a few weeks could lead to a meaningful drag on growth, and a bout of higher inflation, creating a longer-term risk of stagflation. The primary channel is through higher oil prices, which first show up as higher gasoline and other fuel prices, and then filter down to other goods through higher production and transportation costs.

Thanks to shale, the U.S. is among the largest oil producers in the world, practically guaranteeing that a domestic oil supply crisis is unlikely. But oil prices are still determined in the global market and show up at the gas pump. That’s good for U.S. oil producers, but bad for U.S. consumers, especially during the current affordability crunch.

The ISM Services PMI jumped 2.3 points in February to a higher-than-expected 56.1. This was the fifth consecutive gain and the most since September 2024, taking the PMI to its highest level since July 2022. It suggests a notable acceleration in services activity growth, consistent with above-trend economic expansion. The ISM estimates that the latest PMI reading corresponds with a 2.5% annualized growth rate in real GDP. Combined with the ISM Manufacturing PMI, which held above 50 in February for a second consecutive month, this suggests that economic growth is firming up in early 2026.