New york: Rising oil prices due to US and Israeli strikes against Iran, and Tehran's retaliations, have led to a war in the Middle East that has spiked oil prices and stoked economic uncertainty, causing Wall Street to lose trillions of dollars in the first month of the conflict. Concerns about persisting tensions for an extended period have dampened investor risk appetite.
According to Anadolu Agency, the US and Israel's attacks on Iran occurred while negotiations between Tehran and Washington were underway. Tehran's retaliatory attacks on neighboring energy infrastructure and the closure of the Strait of Hormuz have paralyzed shipping traffic in the region and disrupted oil flows, sending markets into turmoil. US stock markets, frequently highlighted by US President Donald Trump for their strong performance, have been affected, dominated by selling pressure.
Since the attacks began in late February, Wall Street stocks have wiped off trillions of dollars, while rising industrial costs and trade disruptions have affected the Dow, which declined 7.7% versus pre-war levels. The S and P 500 lost 7.8% and the Nasdaq 8.3% in the past month. The Dow and the Nasdaq indexes entered correction territory as of last month, having fallen more than 10% from their peak.
Trump stated he expected oil prices to rise further and stock markets to fall more due to the situation in Iran, though he noted the disruption was not as severe as he had anticipated. The situation, however, seems dire. Disruptions in the Strait of Hormuz, a key transit point for one-fifth of global oil, were the main driver of pessimism in the markets. The world faces one of the most serious energy supply risks since the oil shocks of the 1970s, according to the International Energy Agency (IEA).
Oil prices surged rapidly amid supply concerns since the start of the war, with Brent crude trading from the $70 to $80 range before the war to more than $110 per barrel. Trump threatened to strike Iran's energy infrastructure if Tehran did not reopen the Strait of Hormuz to traffic, but he extended the deadline by five days last week. Oil prices fell after Trump's statements, leading to a temporary easing of concerns about a potential ceasefire in the region, but oil rose again later in the week.
Rising oil prices have affected stocks of airlines, logistics firms, and tourism companies the most. The rise in fuel costs hit US airline stocks hard, as fuel makes up around one-third of their operating costs. American Airlines, Southwest Airlines, and United Airlines lost nearly 30% due to rising fuel costs and airspace restrictions in the region. Global security concerns and expectations of more expensive airfare prices led to selloffs of tourism stocks.
Shares of some oil and natural gas firms outperformed despite the broader market selloff, as the rise in Brent crude prices boosted profit margins. ExxonMobil, Chevron, and ConocoPhillips rose between 12% to 17%, reaching all-time highs. Washington made various moves to curb rising energy costs, ranging from tapping into strategic reserves to easing sanctions, but the upward trend continued.
With winter in the rearview mirror and spring in the air, more drivers are on the road, boosting demand and contributing to high gas prices in the US. The average price of gas was measured at $3.99 per gallon, up from $2.98 a month ago, according to the American Automobile Association (AAA). Gas prices rose around $1 per gallon over the last month, or by 26.3% year-on-year. The average gas price could reach $4 in the coming days for the first time since August 2022, AAA warned.
Amid escalating tensions and rising fuel prices affecting sectors like transportation and agriculture, concerns about inflation are increasing. The Fed, which has long sought to bring inflation down to its 2% target, could again face upward pressure. Fed Chair Jerome Powell said at a news conference March 18 that the Middle East developments and their effect on the US economy were uncertain, but the energy shock pushed up inflation estimates. Powell stated rising energy prices will increase overall inflation, but it is still too early to determine the scope and duration of the effects on the economy.
Powell, speaking at a Harvard University lecture Monday, stated that the Fed's policies are in a good place for now as the bank adopts a wait-and-see approach. Financial markets expect no easing from the Fed this year despite two rate cut estimates before the conflict. The possibility of rate hikes this year has again come to the fore. Meanwhile, government bonds rose and the US dollar strengthened amid rising energy prices, leading to expectations that monetary policy will remain tight for longer. The US 10-Year bond yield, which was on a downward trend throughout February before the war, shifted by rising from 3.96% at the end of last month to 4.5% as of last week. The US Dollar Index, which recovered some losses at the start of the year, rose from the range of 97 - 98 before the war to above 100, reaching its peak of the year. The index rose around 3% versus pre-war levels.