Iran-Israel escalation drives up oil prices; US stocks tumble
Oil prices leaped, and stocks slumped Friday on worries that escalating violence following Israel’s attack on Iranian targets could damage the flow of crude around the world, along with the global economy, AP reported.
The S&P 500 sank 1.1% and wiped out what had been a modest gain for the week. The Dow Jones Industrial Average dropped 769 points, or 1.8%, and the Nasdaq composite lost 1.3%, AP reported.
The strongest action was in the oil market, where the price of a barrel of benchmark US crude jumped 7.3% to $72.98.
Oil prices continue to rise, with West Texas Intermediate (WTI) up 7.50% to $73.18 per barrel and Brent crude at $74.56 per barrel, fueled by escalating concerns over a potential Israel-Iran conflict. Analysts warn that Brent could surpass $90 or even hit $100 per barrel in extreme scenarios, Wall Street Pit reported.
Iran, a member of the Organization of the Petroleum Exporting Countries (OPEC), currently produces around 3.3 million barrels per day (bpd), and exports over 2 million bpd of oil and fuel. Spare capacity among OPEC and its allies, including Russia, to pump more oil to offset any disruption is roughly equivalent to Iran's output, according to analysts and OPEC watchers, Reuters wrote.
Goldman Sachs (GS) estimates a potential 1.75 million barrels per day reduction in Iranian oil supply for six months, partially offset by OPEC+, while a Strait of Hormuz closure could spike prices by 35%, though such an outcome is considered unlikely.
Sustained high prices risk demand destruction and inflation, with JPMorgan (JPM) favoring a $60 – $65 range for stability, as consumer affordability could limit prolonged price surges, according to YF reporting.
AP wrote that Iran is one of the world’s major producers of oil, though sanctions by Western countries have limited its sales. If a wider war erupts, it could slow the flow of Iran’s oil to its customers and keep the price of crude and gasoline higher for everyone worldwide.
Beyond the oil coming from Iran, analysts also pointed to the potential for disruptions in the Strait of Hormuz, a relatively narrow waterway off Iran’s coast. Much of the world’s oil that’s been pulled from the ground moves through it on ships.
"Saudi Arabia, Kuwait, Iraq and Iran are wholly locked into one tiny passage for exports," said Rabobank in a note, regarding the strait.
About a fifth of the world's total oil consumption passes through the strait, or some 18 to 19 million barrels per day (bpd) of oil, condensate and fuel.
Past attacks involving Iran and Israel have seen prices for oil spike initially, only to fall later “once it became clear that the situation was not escalating and there was no impact on oil supply,” according to Richard Joswick, head of near-term oil at S&P Global Commodity Insights.
That has Wall Street waiting to see what will come next. US stock prices dropped to their lowest points for the day after Iran launched ballistic missiles toward Israel.
For now, the price of oil has jumped, but it’s still lower than it was earlier this year. “This is an economic shock that nobody really needs, but it is one that seems more like a shock to sentiment than to the fundamentals of the economy,” said Brian Jacobsen, chief economist at Annex Wealth Management.
That in turn sent US stocks to a loss that was notable in size but outside their top 15 for the year so far.