Oil prices surged more than 16% Sunday evening, exceeding $110 per barrel, as escalating hostilities in the Middle East increased pressure on oil transportation and infrastructure. As of 9:58 PM, Brent crude was up 18% to $109, even as West Texas Intermediate (WTI) jumped 20% to $109.58.
Meanwhile, New York futures indexes posted significant losses: Dow Jones Futures fell 1.85%; S&P 500 Futures declined 1.77%, and Nasdaq Futures lost 2.05%. The U.S. Dollar Index (DXY) gained 0.6%. The VIX, often referred to as the “fear gauge,” soared 24.1%.
Oil markets began the week anticipating further instability as the conflict with Iran entered its ninth day, coinciding with production cuts by major exporters, near-capacity storage levels, and a near-halt in ship traffic through the Strait of Hormuz. This price movement underscores the sensitivity of global energy markets to geopolitical risk.
“It’s no longer just about a direct closure of the Strait of Hormuz, but an interruption to supply that is spreading throughout the region,” said Dave Mazza, CEO of Roundhill Financial, according to Bloomberg. “A move like this could lead investors, who are already nervous, to further reduce their risk exposure.”
Last week, a wave of selling impacted various regions and asset classes as rising geopolitical tensions added pressure to markets already weakened by disruptions related to artificial intelligence and concerns about potential credit vulnerabilities.
The worsening crisis has presented investors with a dilemma: the risk of renewed inflationary pressure from rising oil prices versus signals of a cooling U.S. Labor market, which could strengthen the case for monetary easing.
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Overnight Sunday, Iran intensified attacks against its neighbors in the Middle East, while Israel struck fuel depots in Tehran and threatened the Islamic Republic’s power grid.
Former President Donald Trump warned that the U.S. Would consider attacking areas that had not previously been targeted. He stated on social media that attacks would continue “until they surrender or, more likely, collapse totally!”
Lower Production
Kuwait, the fifth-largest producer within OPEC, announced Saturday it had implemented preventative reductions in its oil production and refining capacity, citing “Iranian threats to the safe navigation of vessels through the Strait of Hormuz.” The Kuwait Petroleum Corporation, the state-owned oil company, did not disclose the extent of these cuts.
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Iraq, the second-largest OPEC producer, has experienced a significant decline in production. According to three industry sources cited by Reuters on Sunday, output at the country’s three main oil fields in the south fell 70% to 1.3 million barrels per day. Prior to the conflict with Iran, these areas produced 4.3 million barrels daily.
The United Arab Emirates, the third-largest OPEC producer, said Saturday it was “prudently managing offshore production levels to meet storage demands.” ADNOC, the national oil company of Abu Dhabi, stated its onshore operations remain unchanged.
Gulf Arab nations are reducing production due to a lack of storage capacity, as barrels accumulate without an outlet due to the closure of the Strait of Hormuz. Tankers are avoiding the narrow waterway amid fears of Iranian attacks. Approximately 20% of global oil consumption passes through this key export route.
No Signs of a Ceasefire
At the start of the week, the conflict shows no clear indication of de-escalation, even after former President Trump claimed the conflict was “virtually won.” Reports indicate that Iran has appointed Mojtaba, the son of the late Ayatollah Ali Khamenei, as the country’s new supreme leader. Khamenei was killed by the United States and Israel in the early days of the war.
On Sunday, U.S. Energy Secretary Chris Wright stated that traffic in the Strait of Hormuz should be restored once the U.S. Eliminates Iran’s ability to threaten oil tankers.
“It shouldn’t be long before we see a more consistent resumption of maritime traffic through the Strait of Hormuz,” Wright told CNN in an interview. “We are still far from a normal situation. That will grab some time. But, in the worst-case scenario, we are talking about weeks, not months.”
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(With Bloomberg and CNBC)
