Oil prices jumped significantly over the weekend, thanks to rising tensions in the Middle East. The rise in crude prices represents a growing concern for the stock market and the broader economy, as investors grapple with the implications of U.S. military actions against Iran.
On Sunday evening, U.S. crude oil futures were up 3.8% to about $77 a barrel. Notably, this rise follows recent U.S. strikes on Iranian targets in Fordo, Isfahan, and Natanz. As a result, many investors had expected to see a more diplomatic stance from the U.S. government, catching investors by surprise with the strikes.
The current war has severely exacerbated instability in the area. In retrospect, it’s hardly surprising that oil prices have now skyrocketed, more than quadrupling since the invasion. The U.S. government is looking to do much more. They could hit Iranian military targets close to U.S. bases or they might even threaten to shut down the important Strait of Hormuz, a choke point crucial to the global oil trade.
Analysts say chances are rising that Iran could try to close the strait or attack oil tankers. In doing so, they’ve raised the likelihood of those extreme events happening from about 5% to 15%. Even this increased risk would be enough to result in a crude price premium. As the graph demonstrates, a long-term shutdown of the Strait of Hormuz would drive oil prices well above $100 per barrel.
China is Iran’s biggest oil customer, complicating the geopolitical situation even further. Weitzler US Secretary of State Marco Rubio to Chinese government intervention to make sure that Iran does not stop this important trade route.
The increase in oil prices is yet another possible monkey wrench that the dovish Fed must contend with when it comes to a fragile stock market and economic situation. Jay Woods, a market analyst, commented on the situation:
“When you have conflict, you have an overreaction — a knee jerk reaction — which tends to be an exaggeration, that can last up to two to three weeks.” – Jay Woods
Ahmad Assiri, an energy expert, noted that with the U.S. now fully engaged in the conflict, expectations for oil pricing have drastically shifted:
“Now with the U.S. fully engaged in the conflict, the baseline for oil prices has shifted to the mid $80s range per barrel entering stage two from one-side regional conflict to U.S. managed conflict.” – Ahmad Assiri
The current escalation and military announcements have inspired an understandable sense of foreboding about the prospects for lasting regional peace. President Trump has said that he will consult with Congress before taking any more military action against Iran. This critical decision will occur in the next two weeks.
“There will be either peace, or there will be tragedy for Iran far greater than we have witnessed over the last eight days.” – Trump
With further developments creating spiraling uncertainty over the potential long-term effects on global oil flows and price dynamics, the world’s eyes are fixed on this unprecedented situation. Fadi Arbid, an expert on Middle Eastern affairs, remarked on the region’s response to recent developments:
“The Gulf has distanced itself and has been calling for appeasement, supporting a peaceful resolution, and has gone as far as condemning Israeli aggression.” – Fadi Arbid