Stock markets shuddered worldwide Monday on worries about whether the global economy can withstand spiking prices for oil, which briefly got to nearly $120 per barrel, their highest level since four summers ago.
The S&P 500 fell 1.3 per cent, coming off its worst week since October. The Dow Jones Industrial Average was down 721 points, or 1.5 per cent, as of 9:35 am Eastern time, and the Nasdaq composite was 1.2 per cent lower. That followed even worse losses in European and Asian stock markets.
Since the war with Iran began with attacks by the United States and Israel, the central worry for financial markets has been how high oil prices will go because of it and how long they will stay there. Early Monday, the price for a barrel of Brent crude, the international standard, briefly touched $119.50. It hasn’t been that expensive since the summer after Russia invaded Ukraine in 2022, another military conflict that likewise raised the risk for blockages in the global flow of oil.
If oil prices stay very high for very long, households’ budgets that are already stretched by high inflation could break under the pressure. Companies, meanwhile, would see their own bills jump for fuel and to stock items on their store shelves or in their data warehouses. It all raises the possibility of a worst-case scenario for the global economy “stagflation,” where growth stagnates and inflation remains high.
To be sure, oil prices pared their huge gains Monday following talk that some of the world’s largest economies could coordinate a response to the spiking price of oil. A barrel of Brent crude pulled back to $101.76, though that’s still up 9.8 per cent from Friday.
A barrel of benchmark US crude, meanwhile, jumped 9.6 per cent to $99.59 after briefly spiking as high as $119.48.
The US stock market has a history of bouncing back relatively quickly from past military conflicts, such as Russia’s invasion of Ukraine in 2022, as long as oil prices don’t stay too high for too long. And for all of the recent swings in the market, the S&P 500 index that sits at the heart of many 401(k) accounts is still within 5 per cent of its record set in January.
That has some professional investors suggesting drops in prices for stocks could ultimately offer opportunities to buy them at cheaper levels before they rise again.
“We continue to believe that the current acute shortage of oil will be reversed in the coming months as new supply comes online and oil should drop significantly,” according to Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute.
All that hinges, though, on the flow of oil returning toward normal. At the moment, it’s far from that.
Consider the Strait of Hormuz, a narrow waterway off Iran’s coast that a fifth of the world’s oil sails through on a typical day. Now, tanker traffic has all but stopped because of worries about a possible attack by Iran.
If the strait remains closed for only a few weeks, the price of oil could push to $150 per barrel of higher, according to oil and gas strategists at Macquarie Research.
“Although we are not attempting to predict how long Hormuz transit will be substantially or completely curtailed, we are growing more confident that without an agreement and a fast cessation of all kinetic activity, the crude market will begin to break in days, and not in weeks or months,” the strategists led by Vikas Dwivedi wrote in a report.
The most immediate pain on Wall Street is hitting companies that have already big fuel bills.
Carnival lost 7.3 per cent because it has to fill huge cruise ships with fuel. United Airlines sank 6.9 per cent, and Old Dominion Freight fell 3.8 per cent.
Retailers who have to ship in products from far away, while also needing their customers to have enough budget space leftover after gasoline to spend, also struggled. Best Buy fell 4.4 per cent, and Williams-Sonoma dropped 4 per cent.
In stock markets abroad, where economies are more dependent on the import of oil and natural gas, stocks fell even more. South Korea’s Kospi sank 6 per cent, Japan’s Nikkei 225 tumbled 5.2 per cent and France’s CAC 40 dropped 1.7 per cent.
A Chinese special envoy to the Middle East, Zhai Jun, called for an end to the attacks and said strikes on non-military targets and civilians should be condemned. Meanwhile, South Korean President Lee Jae Myung warned against hoarding, panic buying and collusion between refiners and gas stations.
Both sides in the war struck new targets over the weekend, including civilian ones. Bahrain accused Iran of hitting one of the desalination plants that are crucial for drinking water in Gulf countries. Its national oil company declared force majeure after the country’s sole oil refinery was attacked. Israel struck oil depots in Tehran, sending up thick smoke and causing environmental alerts.
President Donald Trump said late Sunday that high oil prices at the moment are worth the cost.
“Short term oil prices, which will drop rapidly when the destruction of the Iran nuclear threat is over, is a very small price to pay for USA., and World, Safety and Peace,” he said in a posting on his social media network.
In the bond market, the yield on the 10-year Treasury remained at 4.15 per cent, where it was late Friday.
Worries about high inflation and oil prices are pushing upward on Treasury yields. But worries about a potentially slowing economy are pulling downward at the same time.
Worries about possible stagflation worsened Friday following a surprisingly weak report on the US job market showing that employers cut more jobs last month than they added.
