U.S. stocks opened lower on Monday as global oil prices jumped amid signs that U.S.-Israel military strikes in Iran were expanding across the region, raising concerns about potential disruptions to global petroleum supplies.
The S&P 500 dropped 53 points, or 0.8%, to 6,826, while the Dow Jones Industrial Average 0.9% and the Nasdaq Composite sank 0.7%. Oil prices rose sharply as Brent crude, the international price benchmark for crude, jumped nearly 9% to $79.31 per barrel on Monday, its highest point in more than a year.
Wall Street analysts warned on Monday that the growing conflict could disrupt global oil shipments, with roughly 20% of the world’s supply moving through the Strait of Hormuz, the narrow mouth of the Persian Gulf. Any interruption would likely lift crude prices, driving up gasoline costs for U.S. consumers and raising energy expenses for businesses, according to economists.
“Uncertainty about oil prices may play a big role in determining broader market sentiment,” said Chris Larkin, managing director of trading and investing at E*Trade from Morgan Stanley, in an email. “There are more questions than answers right now, but a stabilizing energy picture could have a positive ripple effect, while concerns about a longer-term disruption could have the opposite.”
Why the impact could be modest
Some analysts expect a relatively modest economic impact. The drag from higher oil prices isn’t likely to be as severe as in past decades because the U.S. “has switched from being a net importer to being a net exporter of oil,” noted John Higgins, chief markets economist at Capital Economics, in a research note.
As a result, stock prices are likely to perform better than during the 1970s, when the 1973-74 oil embargo caused surging oil prices and rising inflation, contributing to a recession, Higgins added.
Vital “choke point”
In the near term, Wall Street is focused on a potential disruption in the flow of oil tankers through the Strait of Hormuz, which is just 21 miles wide at its narrowest point. The strait facilitates the transit of millions of barrels of oil and petroleum products per day, according to the Energy Information Administration, a branch of the U.S. Department of Energy.
Iran controls the northern side of the strait, which runs along its border, and Oman and the United Arab Emirates control the southern side. With hostilities in the region escalating, there are signs that tankers are holding off on traveling through the strait, experts said.
“Oil and gas tanker traffic through the Strait of Hormuz has ground to a near halt, satellite data show, as oil firms and trading houses have put voyages on hold out of fear that Iran might target vessels passing through this maritime choke point,” Eurasia Group analysts said in a March 1 report.
They added that even a break of a few days for oil deliveries through the Strait of Hormuz “would cause a significant disruption to global supply.”
China at risk
Iran exports roughly 1.6 million barrels of oil a day, mostly to China. It may need to look elsewhere for supply if Iran’s exports are disrupted, another factor that could increase energy prices.
Also hurting the broad market was a report Friday showing that inflation at the U.S. wholesale level was at 2.9% last month, much higher than the 1.6% that economists expected.
That could pressure the Federal Reserve to hold off longer on its cuts to interest rates. Lower rates would give the economy and prices for investments a boost, but they risk worsening inflation.
