Prepare for oil to rally as the Fed gets set to pause its rate hikes, JPMorgan says

• Since 1988, the final Fed rate hike has been followed by increases in the price of Brent crude three months later.
• In those instances, oil has returned 9% on average, according to a note from JPMorgan.

Oil prices are poised to rally soon as the Federal Reserve is expected to pause its rate hikes, analysts at JPMorgan said.

Since 1988, the final increase in a tightening cycle has been followed by increases in the price of Brent crude three months later, returning on average 9%, according to a recent note.

JPMorgan predicts Brent will rise to $94 a barrel in the fourth quarter, up 9.5% from current levels.

"The main takeaway for now: if the Fed pauses its rate-hiking campaign soon, the most likely scenario is that oil performs well," analysts said.

Markets expect the Fed to raise rates one more time in May, lifting them by another 25 basis points to a target range of 5%-5.25%, according to the CME FedWatch tool. But after that, no further hikes are seen.

To be sure, oil eventually turned negative after Fed pauses in 2000, 2006 and 2018 were followed by recessions, JPMorgan pointed out.

"However, if the US sees only a mild recession or lands softly, a new bull market may have already started forming," the note added.

JPMorgan predicts such a recession to show up at the end of 2023, or in 2024. And as inflation could stick around 4% this year, the Fed is unlikely to cut its rates.

But analysts expect demand for oil to stay resilient as the need for transportation fuel remains elevated and US commercial crude inventories are starting to shift downwards.

Others on Wall Street are less worry about a major recession as well, with BlackRock CEO Larry Fink crediting the large amount of federal stimulus as enough to rule out a hard landing.