Summary - Oil prices jumped sharply on Monday as the ongoing conflict in the Middle East and related shipping disruptions raised concern about a prolonged period of elevated energy costs. The moves fed through to financial markets: equity futures in the United States and Asia fell, bond futures weakened, and the U.S. dollar gained against major currencies.
Brent crude leapt 17% to $108.73 a barrel on Monday, after a 28% surge the prior week, while U.S. crude rose 19% to $108.33 per barrel. The increase in oil came as Iran named Mojtaba Khamenei to succeed his father Ali Khamenei as supreme leader, a development that market commentary said signalled hardliners remain firmly in charge in Tehran a week into its conflict with the United States and Israel.
With hostilities showing no sign of abating and tankers reportedly avoiding the Strait of Hormuz, market participants were preparing for a potentially extended period of higher energy bills. "The global economy remains dependent on the concentrated flow of Mideast oil and natural gas through the Strait of Hormuz," Bruce Kasman, chief economist at JPMorgan, said. He outlined a near-term scenario of a spike toward $120 a barrel followed by moderation as the conflict fades, and also said that without a clear political resolution Brent could settle at an elevated $80 a barrel through mid-year.
Kasman quantified the potential economic effect, saying such an outcome could shave 0.6% from annualised global growth in the first half of the year and lift consumer prices by an annual rate of 1%. He also warned that a broader, sustained conflict could push oil above $120 a barrel and pose a risk of global recession.
Market moves were pronounced in equity derivatives. Wall Street led declines in early trade with S&P 500 futures down 1.6% and Nasdaq futures falling 1.7%. In Japan, Nikkei futures plunged to 52,400 from Friday's cash close of 55,620. In the bond market, inflation risk appeared to outweigh safe-haven demand: 10-year U.S. Treasury note futures slid 13 ticks and three-year futures dropped 22 ticks.
Currency markets reflected a flight to dollar liquidity and aversion to the currencies of net energy importers. The dollar strengthened 0.3% to 158.35 yen, while the euro decreased 0.7% to $1.1537. Precious metals saw some profit-taking: gold eased 0.6% to $5,140 an ounce, with traders reportedly booking gains to cover other losses.
Key points
- Oil surged again - Brent rose 17% to $108.73/bbl and U.S. crude climbed 19% to $108.33/bbl, following a 28% jump in Brent last week.
- Geopolitical developments in Iran and ongoing hostilities involving the United States and Israel have heightened concerns about oil supply routed through the Strait of Hormuz.
- Equity futures and bond futures weakened while the U.S. dollar gained, reflecting investor demand for liquidity and concerns about rising inflation and possible interest rate pressure.
Risks and uncertainties
- Duration of the Middle East conflict - continued hostilities could sustain high energy costs and weigh on global growth and consumer prices.
- Escalation scenario - a broader, prolonged conflict could push oil above $120 a barrel and heighten the risk of a global recession, according to the JPMorgan view cited.
- Market liquidity and currency stress - demand for dollars and weakness in currencies of net energy importers may persist while shipping through the Strait of Hormuz remains disrupted.
The economic and market effects described above were drawn from market moves and commentary at the time, and reflect the direct links between energy market disruptions, investor behaviour, and risk pricing across equities, bonds, currencies, and commodities.