Global stock markets tremble after oil prices surge to nearly $120 a barrel

The S&P 500 fell 1%, posting its worst week since October. this Dow Jones As of 9:35 a.m. ET, the Industrial Average was down 576 points, or 1.2%, and the Nasdaq Composite was down 0.8%. European and Asian stock markets suffered even steeper losses.

Since the war with Iran began due to attacks by the United States and Israel, the main worry in financial markets has been how much oil prices will rise as a result and how long it will last. Earlier on Monday, Brent crude oil prices, the international standard, hit $119.50 a barrel. Oil has not been that expensive since Russia invaded Ukraine in the summer of 2022, and another military conflict also increases the risk of disrupting global oil flows.

If oil prices remain high for an extended period, household budgets already stretched thin by high inflation could collapse under the pressure. At the same time, companies will see their own fuel bills and inventory costs on store shelves or in data warehouses rise significantly. This all raises the possibility of a worst-case scenario for the global economy, known as “stagflation,” in which growth stagnates and inflation remains high.

To be sure, oil prices gave back huge gains on Monday following rumors that some of the world’s largest economies might coordinate a response to a spike in oil prices. Brent crude oil prices rebounded to $102.18 a barrel in early trading, but were still up 10.2% from Friday.

Meanwhile, U.S. benchmark crude oil prices rose 7.1% to $97.34 after briefly surging to $119.48.

As long as oil prices don’t stay too high for too long, U.S. stocks have a history of rebounding relatively quickly from past military conflicts, such as Russia’s invasion of Ukraine in 2022. Despite recent market volatility, the S&P 500, the centerpiece of many 401(k) accounts, remains within 5% of its record set in January.

Some professional investors say falling stock prices could ultimately provide an opportunity to buy cheaper before prices rise again.

Sameer Samana, global head of equities and real assets at Wells Fargo Investment Institute, said, “We continue to believe that the current severe oil shortage will be reversed in the coming months as new supply comes online, and oil prices should fall significantly.”

However, this all depends on oil flows returning to normal. Currently, this is far from the case.

Take the Strait of Hormuz, a narrow waterway off the coast of Iran through which a fifth of the world’s oil passes every day. Now, tanker traffic has all but come to a halt amid fears of a possible Iranian attack.

Oil and gas strategists at Macquarie Research said oil prices could rise to $150 a barrel if the strait is closed for just a few weeks.

“While we are not trying to predict how long Hormuz transit will be significantly or completely curtailed, we are increasingly confident that without a deal and a rapid halt to all dynamic activity, the crude market will begin to collapse in days, not weeks or months,” strategists led by Vikas Dwivedi wrote in a note.

The most immediate pain on Wall Street is for companies already saddled with huge fuel bills.

Carnival Corp. fell 5.3% as the company must refuel its large cruise ships. United Airlines fell 5% and Old Dominion Freight fell 3.4%.

Retailers have to ship products from great distances while also providing enough space for customers. Best Buy fell 4.5% and Williams-Sonoma fell 4.5%.

Overseas, stocks fell even further as the economy became more reliant on oil and natural gas imports. South Korea’s Kospi fell 6%, Japan’s Nikkei 225 fell 5.2% and France’s CAC 40 fell 1.8%.

China’s special envoy for the Middle East, Zhai Jun, called for an end to the attacks and said attacks against non-military targets and civilians should be condemned. Meanwhile, South Korean President Lee Jae-myung warned against hoarding, panic buying and collusion between refineries and gas stations.

Both sides in the war struck new targets, including civilians, over the weekend. Bahrain has accused Iran of attacking one of the desalination plants vital to the Gulf state’s drinking water. Its national oil company declared force majeure after the country’s only refinery was attacked. Israel has attacked Tehran’s oil depots, sending plumes of smoke and triggering environmental alerts.

In the bond market, the 10-year Treasury yield remained at 4.15%, the same as late Friday.