Oil Prices Surge, Stocks Fall as Middle East Conflict Escalates | Reuters

Oil prices jumped sharply Monday, and equity markets broadly retreated as escalating military conflict in the Middle East fueled investor anxiety. Brent crude surged 7.5% to $78.34 a barrel, while West Texas Intermediate (WTI) climbed 7.3% to $71.88 per barrel. The moves reflect growing concerns about potential disruptions to global oil supply, particularly through the strategically vital Strait of Hormuz. Gold, often seen as a safe haven asset, rose 1.5% to $2,358 an ounce.

The immediate catalyst is the ongoing exchange of strikes between the United States and Israel against Iranian targets, and Iran’s retaliatory missile barrages across the region. President Donald Trump suggested the conflict could last for another four weeks, adding to the uncertainty. The situation is particularly sensitive given the potential for wider regional involvement and the risk of disruption to energy flows.

Strait of Hormuz: A Critical Chokepoint

Around 20% of the world’s seaborne oil trade, and a similar percentage of liquefied natural gas, passes through the Strait of Hormuz, a narrow waterway between Iran and Oman. While the strait hasn’t been formally blocked, marine tracking data indicates a significant buildup of tankers on either side, reflecting caution among shipping companies and potential difficulties securing insurance for voyages through the region. Jorge Leon, head of geopolitical analysis at Rystad Energy, estimates that the current situation is effectively halting the flow of approximately 15 million barrels of crude oil per day to global markets. As reported by The Guardian, Leon expects a “significant upward repricing of oil” if de-escalation signals don’t emerge quickly.

Inflationary Risks and OPEC+ Response

A sustained increase in oil prices poses a risk of reigniting inflationary pressures globally, adding to costs for businesses and consumers. This comes at a delicate time for many economies still grappling with the aftermath of previous inflationary spikes. OPEC+, the group of oil-producing nations, agreed Sunday to a modest output boost of 206,000 barrels per day for April, but the effectiveness of this increase is questionable given the logistical challenges of getting that oil to market through the Middle East.

The current situation evokes historical parallels, according to Alan Gelder, SVP of refining, chemicals and oil markets at Wood Mackenzie. Gelder draws a comparison to the Middle East oil embargo of the 1970s, which saw oil prices triple to around $12 per barrel in 1974 (equivalent to approximately $90 per barrel in 2026 dollars). He suggests that surpassing this level in the current market, given concerns about significant supply losses, is “particularly achievable.”

Regional Market Reactions

Asian stock markets led the decline Monday, reflecting the heightened risk aversion. Japan’s Nikkei 225 index fell 2.3%, with airline stocks particularly hard hit due to their sensitivity to fuel costs. South Korea’s KOSPI index dropped 1.0%, despite a strong performance earlier in the year. MSCI’s broadest index of Asia-Pacific shares outside Japan declined 0.6%. European futures also pointed to a lower open, with EUROSTOXX 50 futures down 1.9% and DAX futures shedding 1.8%. U.S. Stock futures followed suit, with both S&P 500 and Nasdaq futures losing 1.1%.

Dollar Strength and Bond Market Dynamics

The oil shock reverberated through currency markets, with the U.S. Dollar benefiting from its status as a safe haven and the fact that the U.S. Is a net energy exporter. The euro weakened 0.4% to $1.1768 against the dollar. The Japanese yen, traditionally a safe harbor, experienced more mixed flows due to Japan’s complete reliance on imported oil. The dollar gained 0.3% against the yen, reaching 156.55 yen, and also strengthened against the Australian dollar, often used as a proxy for global risk.

In the bond market, yields on 10-year Treasury notes fell 2 basis points to a three-month low of 3.926%, having dipped below 4% last week. This reflects increased demand for safe-haven assets. Bond market gains were also influenced by concerns stemming from the administration of UK mortgage lender MFS, which was placed into administration following allegations of financial irregularities. As reported by the Associated Press, MFS had borrowed £2 billion ($2.69 billion), and its collapse stoked wider credit fears.

U.S. Economic Data Week Ahead

Adding to the market’s challenges, a busy week of U.S. Economic data is on the horizon, including reports on manufacturing activity (ISM survey), retail sales, and the crucial monthly payrolls report. Any signs of weakness in the U.S. Economy could further shake investor confidence, but could also increase expectations for interest rate cuts by the Federal Reserve. Market currently price in a 53% chance of a rate cut in June, and approximately 60 basis points of cuts throughout the year.

Iran’s Strategic Position and Oil Production

Iran’s ability to disrupt oil flows is significant. Euronews reports that Iran has repeatedly threatened to blockade the Strait of Hormuz in response to military aggression. Despite U.S. Sanctions impacting its oil output, Iran remains a top-ten oil producer, currently producing around 3.1 million barrels per day, down from a peak of six million barrels per day in 1974. Its production costs are relatively low, around $10 per barrel, making it a profitable producer even under sanctions. China is a key customer, receiving over 80% of Iran’s oil exports.

Still, analysts note that Iran has limited incentive to completely close the Strait of Hormuz, as it would also cut off its own exports and harm its relationship with China. The situation remains fluid, and the extent of any prolonged disruption to oil supplies will depend on the evolving geopolitical landscape.

Looking Ahead: Monitoring the Strait The immediate focus will be on developments in the Strait of Hormuz. Any further escalation or confirmed disruptions to tanker traffic will likely drive oil prices higher. Investors will be closely watching for diplomatic efforts to de-escalate the conflict and restore stability to the region. The upcoming U.S. Economic data releases will also play a role in shaping market sentiment and influencing expectations for Federal Reserve policy.