Crude Expectations

Photo of my last trip to the gas station

“Why are stocks hitting all-time highs when oil prices are above $100, consumer sentiment is at record lows, and geopolitical headlines look scary?” This is the question I have been asked more than any other in recent weeks.

The answer: Because markets are forward-looking. Stocks are priced based on long-term future cash flows. A temporary spike in oil prices matters less to intrinsic value than some investors assume. Markets care more about duration than magnitude.

Over my career, I have ignored the University of Michigan Consumer Sentiment survey. It is not predictive of stock prices. While there is a slight relationship between consumer sentiment and stock prices, it’s one of stock prices leading sentiment, not the other way around.

One mental exercise I use is called “time-traveling reporter.”

Imagine stepping into a time machine and traveling 12 months into the future. What headline do you write?

Is it:

“Global economy crippled by sustained Middle East energy shock”

Or:

“Oil prices retreat as shipping lanes reopen and tensions ease”

That distinction matters for asset prices.

This is one reason I find prediction markets and commodity futures prices interesting. They function like a time machine. They convert collective expectations about future geopolitical and macroeconomic outcomes into prices today.

Kalshi’s contract, “When will traffic at the Strait of Hormuz return to normal?” is priced at 85% for July 1, 2027, or earlier. Crude oil futures for May 2027 are priced at $78 per barrel, a 26% drop from today’s spot price.

These predictions may turn out to be wrong. But the stock market is not ignoring the headlines. It is simply trying to price the probability distribution of what the world looks like next year.

Investors tend to make better decisions when they think probabilistically, embrace uncertainty, and consider a range of potential outcomes rather than anchoring on a single narrative-driven forecast.