Oil spikes, markets retreat as West Asia tensions ripple global economy

Oil prices rose to a five-month high on Monday as West Asia remained tense after the United States entered Israel’s war on Iran.

Ahead of the US markets’ opening, future contracts were largely flat that suggested that investors were waiting for the Iranian retaliation cautiously but were not in panic. Notably, US defence companies’ future contracts were up whereas European defence companies were trading in the red.

The United States on Saturday bombed Iran’s nuclear facilities at Natanz, Fordow, and Isfahan. Iran has vowed retaliation and may respond with attacks on US interests in West Asia. However, Iran’s retaliation may also include non-kinetic measures like cyberattacks or acts of sabotage.

For the wider world, the most immediate concern is energy supply. There are voices within Iran that have called for the blocking of the Strait of Hormuz . Analysts have said that the blockade could raise energy prices by more than a third.

Oil surges but settles — all eyes on Strait of Hormuz

Crude oil surged to a five-month high on Monday before falling in the day.

Brent crude surged by around 3.8 per cent from $78.97 to a high of $81.40 in the day before settling at around 0.39 per cent high at the time of writing.

Even as tensions are high in West Asia, there has not been any escalation outside of Iran or disruption of trade in West Asia that would rattle markets.

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The main concern is the Strait of Hormuz that Iran dominates. In retaliation of the US strikes, there are calls in Iran to block the waterway. As around 20 per cent of world’s all oil and gas passes through the strait, the blockade would affect the whole world.

If Iran blocks the Strait of Hormuz, global oil prices could reach $120 a barrel and US inflation could reach 5 per cent, according to JP Morgan Chase analysts.

They further said that a regime change in Iran may raise oil prices by up to 76 per cent, according to historical trends.

Markets remain tense but steady

There was no major turmoil in US markets even as investors remained concerned.

Dow Jones futures were down just 25 0.06 per cent, S&P 500 futures were down 0.04 per cent, and Nasdaq-100 futures were up 0.09 per cent.

There was also no sign of a rush to the traditional safety of Treasuries, with 10-year yields rising about 2 basis points to 4.389 per cent.

There was no sign of rush to the safe haven of Treasuries with 10-year yield rising just 2 basis points.

Adam Crisafulli of Vital Knowledge said in a Monday note that " investors aren’t terribly panicked about an oil market calamity" because of the asymmetry between the United States and Iran.

“Geopolitical risks are undoubtedly elevated in the Middle East right now, but our view remains that the extreme asymmetry of the conflict (with Iran’s military capabilities, and those of its proxy partners, significantly degraded), coupled with Tehran’s relative isolation (with few, if any, allies willing to come to its assistance) and ample global oil supplies, will help keep the fallout contained,” said Crisafulli, as per CNBC.