The weekend was marked by tensions between the US, Israel, and Iran, leading to hundreds of explosions targeting broader Middle East countries as well, including the UAE, Saudi Arabia, Qatar, Bahrain and Kuwait. The flare-up was predictable; markets had been preparing for weeks as US warships advanced to the region preceding the explosions. Yet the events had an immediate effect, sending oil and gas prices higher at the weekly opening bell — casting a shadow over OPEC’s Sunday announcement that the group will accelerate output increases to 206’000 barrels per day in April.
Alas, the disruption of global oil flows due to Middle East tensions dwarfs that number, especially as there are warnings about OPEC’s capacity to significantly increase output and to ship this oil to the market while the Strait of Hormuz — partly controlled by Iran — is now effectively closed.
About 20% of global oil flows transit the Strait of Hormuz, 45% of energy exports are destined for China, more than 80% of LNG exports head toward Asia, and around 30% of Australian refined oil passes through the Strait. Al Jazeera reported yesterday that these developments could remove up to 17 billion barrels of oil from the market — roughly 5.5 months of global crude demand. It’s massive.
No wonder US crude jumped more than 10%, past $75 per barrel at the open, Brent hit $78, and natural gas prices also came under upward pressure. With the initial shock behind, prices are retreating somewhat as investors readjust risk calculations and consider that global oil reserves could cushion part of the disruption — at least temporarily. Also, nearly 70% of global oil production comes from outside the Middle East and does not need to transit the Strait of Hormuz. US shale — which accounts for about 60–70% of US oil production, and more than 20% of global oil supply — could also help mitigate the impact.
But, of course, the longer tensions persist — and the wider they spread geographically — the greater and more durable the impact on energy prices. Recent news suggests that Iran is not ready to negotiate with the US, so for now, tensions appear set to continue. Some analysts already see oil prices rise above the $100pb mark.
Middle East tensions and the disruption to global oil flows could have ripple effects across global economies. Higher energy prices have a notable impact on inflation. Energy typically makes up around 8–10% of CPI baskets, but during major shocks, it can account for up to one-third to one-half of headline inflation — with indirect effects amplifying the impact further.
This, combined with the US PPI coming in significantly higher than expected last Friday, suggests that the last mile toward the Federal Reserve’s (Fed) 2% target could be even more complicated than previously anticipated. In Europe, a period of rising energy prices could compromise the recent easing of inflation below the European Central Bank’s (ECB) policy target. Given that growth in most regions is still recovering from pandemic, trade and geopolitical tensions, stagflation risks may reemerge depending on how long Middle East tensions last.
This morning, tensions are pushing capital toward safe-haven assets. Gold is flirting with $5’400 per ounce, the US dollar is broadly stronger against major peers, and the US 10-year yield slipped below 4% — already on Friday — due to a major selloff that hit bank stocks over rising stress regarding exposure to private credit risks. That first emerged after an aggressive selloff across software companies this year, topped by news that major lenders had exposure to a UK mortgage company under investigation for irregularities.
Beyond that, strong earnings from Big Tech companies failed to revive appetite in AI enablers, as investors remain uncomfortable with massive capex increasingly financed by debt. Escalating Middle East tensions could further affect Big Tech and software stocks via the inflation and rates channel.
Higher energy prices have a direct earnings impact: data centers are power-intensive, electricity costs rise with energy inputs, logistics and component transport become more expensive, and corporate customers may trim IT spending if energy squeezes margins.
A sustained oil spike could lift inflation expectations and bond yields, pressuring long-duration growth valuations by raising discount rates. That matters for companies like Nvidia, Microsoft, Apple, and Alphabet, whose multiples are sensitive to future revenues and real yields.
Over the latest tightening cycle, these companies managed to outperform thanks to AI enthusiasm. But we have probably hit a peak cycle in AI stocks, and a period of concern has emerged, especially regarding leveraged investments. While a large portion of AI capex is still funded through substantial operating cash flows, the fact that these firms are now issuing debt to finance extra infrastructure build-outs means that additional funding costs could rise in a higher-for-longer rate environment, marginally reducing financial flexibility.
Globally, the combination of higher energy costs, broader economic risks, potentially higher discount rates, and rising financing costs will likely weigh on equity valuations.
Appetite across global equities is limited today. The Chinese CSI 300 is surprisingly higher, but the Japanese Nikkei is down 1% at the time of writing, the Hang Seng Index is pushing below its 100-DMA with around a 2% loss, and US and European markets are set to open on a deeply negative note. Among US indices, tech-heavy Nasdaq futures are leading losses, while in Europe, the energy-sensitive DAX will probably see the biggest pressure.
Overall, this week was supposed to be focused on the latest US jobs figures and a few more earnings — primarily from Broadcom and Alibaba. But the geopolitical headlines are likely to be the biggest driver of prices during what promises to be a highly volatile week.
