Retail Goes All-In on Oil: What Surging Prices Could Mean for the S&P 500

Oil prices continue their upward trajectory amid persistent tensions in the Middle East. Brent crude reached above $106 per barrel on Sunday before pulling back modestly in early Monday trading.

Against this backdrop, retail demand for oil exposure is surging. Trailing one-month retail purchases in pure-play oil ETFs hit a record $211 million on Thursday.

Retail Investors Flood Into Oil as Middle East Conflict Sends Prices Soaring

According to The Kobeissi Letter, the United States Oil Fund ETF (USO) alone attracted $32 million in retail inflows, the third-largest daily purchase on record. 

Overall, the retail oil ETF purchases are now roughly 10 times their five-year average. This suggests a sharp spike in demand from individual investors.

“Trailing 1-month retail purchases in pure-play oil ETFs surged to a record +$211 million on Thursday. This exceeds the May 2020 peak of +$200 million and is 3 times the 2022 high of +$70 million,” the post read.

But does the oil price spike spell trouble for equities? Historical data suggests otherwise. The Kobeissi Letter noted that data spanning four decades show that the S&P 500 has averaged a 24% gain in the 12 months following a 20% or more two-day oil surge. 

Since 1986, the index has finished higher a year after such a spike in six of seven occurrences.

“The strongest recovery was +54% following the 2020 pandemic crash, driven by a massive stimulus response from central banks and governments,” The Kobeissi Letter added. “Oil shocks are historically brief and provide long-term buying opportunities.”

The lone exception was the 2008 financial crisis. The takeaway: Oil shocks that do not coincide with economic downturns have historically been followed by strong rallies in the S&P 500.