Brent crude oil prices topped $95 per barrel today – continuing their 30% rally since June.

Saudi Arabia and Russia decided to reduce their supply in early August. US shale production is down.

This may be a short term price spike – as we enter a recession and demand falls. Or it might be sustained for longer and we could see prices go higher than the $115 levels we saw last year.

In each case, these high oil prices affect credit markets.

Below are some possible risks/upsides to watch for.

Headline Inflation: higher oil prices in themselves give us higher headline inflation.

Inflation Expectations: higher prices in fuel and energy, as well as passed-through prices from higher costs for products such as air travel and manufactured goods, can create higher inflation expectations among consumers and businesses.

Higher Terminal Rates Than Expected: to tame inflation and inflation expectations, central banks may need to increase rates higher than currently expected by markets.

Stagflation: higher oil prices, higher inflation and higher rates increase the risk of greater output drops, lower demand through tighter household balance sheets and higher unemployment.

Corporate Credit Downgrades And Defaults: higher input costs reduce EBITDA for a range of companies – at an already stressed time. Some airlines, shipping companies, logistics companies and manufacturing companies, for example, may be more challenged if their oil price risk is not hedged. Credit rating downgrades, defaults and restructurings could follow in some cases.

Consumer Credit Deterioration: lower household net disposable income and higher unemployment could result in higher consumer credit arrears and default rates.

Currency Volatility And Dollar Strengthening: we could see greater currency volatility if oil prices maintain high levels, and could see dollar strengthening if worsening economic conditions reduce market risk appetite and increase capital flows into dollars as a safe haven play.

Emerging Market Sovereign Credit: some net importer emerging markets, particularly those with subsidized energy, may experience greater financial stress.

Greater Short-Term Support Of Fossil Fuels: government and public opinion may support greater short term use of fossil fuel production to reduce foreign reliance.

A Faster Long-Term Transition To Alternative Energy: there could be an increased push to adopt solar, wind, nuclear and other fuel sources. This may translate to greater government support or subsidies.

Sovereign Wealth Fund Credit Demand: some oil producer state sovereign wealth funds may have additional funds available for credit markets.

Oil Producer Primary Credit Issuance: many large oil producers are diversifying their economies away from oil production. Higher oil prices could provide some states with additional equity capital for infrastructure, industrial and other projects – which could then by supported by international credit markets.

Geopolitical And Election Effects: higher oil prices could create a number of geopolitical pressures – from a call for greater self-reliance, to more aggressive foreign policy, to increased demand for a quick end to the Ukraine war. This could affect election results – including the US 2024 presidential election – with knock-on effects for government policy and credit.

Asset Price Contagion: the risks above – including the risk of higher rates, recession resulting in lower equity prices, worsened credit performance increasing credit spreads increase the risks of financial market institution stresses as we saw with the banking crisis earlier this year. This risks further increasing credit spreads as investors are forced to sell holdings to cover other realized, marked-to-market or expected losses.