Oil prices surge as global markets hold breath over Iran’s next move
Global Markets Watch Iran’s Response to US Strike
The global markets appeared to take the US strike against nuclear targets in Iran in stride as investors watched Monday to see how Iran will react. The price of oil initially jumped more than 2% before trading about 60 cents higher, while U.S. stock futures and most share benchmarks in Europe and Asia declined.
Analysts Weigh In on Potential Outcomes
The big unknown is what Iran will do, analysts said, while the US military’s strike on three Iranian sites raised urgent questions about the remaining parts of Tehran’s nuclear program. Neil Newman, managing director of Atris Advisory Japan, believes that the thinking is that it will be a short conflict, with one big hit by the Americans being effective and then returning to business as usual.
"I believe what we are thinking is or the thinking is that it is going to be a short conflict," said Newman. "The one big hit by the Americans will be effective and then we’ll get back to sort of business as usual, in which case there is no need for an immediate, panicky type of reaction."
Oil Prices React to US Strike
The price of Brent crude oil, the international standard, was up 0.7% at $77.59 a barrel, while U.S. crude also jumped, gaining 0.7% to $74.36 a barrel. The attacks on Saturday raised the stakes in the war between Israel and Iran, with futures for the S&P 500 and the Dow Jones Industrial Average slipping 0.3%.
Europe’s Markets React to US Strike
In Europe, Germany’s DAX lost 0.2% to 23,302.51, while the CAC 40 in Paris was down 0.4% at 7,562.06. Britain’s FTSE 100 edged 0.1% lower to 8,763.16. The conflict began with an Israeli attack against Iran on June 13 that sent oil prices yo-yoing and rattled other markets.
Impact of Strait of Hormuz Closure
Iran is a major oil producer and sits on the narrow Strait of Hormuz, through which much of the world’s crude passes. Closing off the waterway would be technically difficult but could severely disrupt transit through it, sending insurance rates spiking and making shippers nervous to move without U.S. Navy escorts.
"The situation remains highly fluid, and much hinges on whether Tehran opts for a restrained reaction or a more aggressive course of action," said Kristian Kerr, head of macro strategy at LPL Financial in Charlotte, North Carolina.
US Secretary of State Marco Rubio Warns Against Disrupting Traffic
Speaking to Fox News on Sunday, US Secretary of State Marco Rubio said disrupting traffic through the strait would be "economic suicide" and would elicit a US response. "I would encourage the Chinese government in Beijing to call them about that because they heavily depend on the Strait of Hormuz for their oil," Rubio said.
Market Experts Predict Iranian Leaders’ Reaction
Tom Kloza, chief market analyst at Turner Mason & Co, expects Iranian leaders to refrain from drastic measures and oil futures to ease back after the initial fears blow over. Disrupting shipping would be "a scorched earth possibility, a Sherman-burning-Atlanta move," Kloza said.
Ed Yardeni, a long-time analyst, agreed that Tehran leaders would likely hold back. "They aren’t crazy," he wrote in a note to investors Sunday. "The price of oil should fall and stock markets around the world should climb higher."
Other Experts Warn of Potential Consequences
However, other experts weren’t so sure. Andy Lipow, a Houston analyst who has covered oil markets for 45 years, said countries are not always rational actors and he wouldn’t be surprised if Tehran lashed out for political or emotional reasons.
"If the Strait of Hormuz was completely shut down, oil prices would rise to $120 to $130 a barrel," said Lipow. "That would translate to about $4.50 a gallon at the pump and hurt consumers in other ways."
East Asia Markets React to US Strike
Much of East Asia depends on oil imported through the Strait of Hormuz. Taiwan’s Taiex fell 1.4% while the Kospi in South Korea initially lost 1% but then regained some lost ground to fall 0.2% to 3,014.17.
Japanese Market Reacts to US Strike
In Tokyo, the Nikkei 225 edged 0.1% lower to 38,354.09, with gains for defense contractors, oil companies and miners helping to make up for broad losses.
"The U.S. strike on Iran certainly is very good for defense equipment," Newman of Atris Advisory said, noting that both Japan and South Korea have sizable military manufacturing hubs.
Australian Market Reacts to US Strike
Australia’s S&P/ASX fell 0.4% to 8,475.90.
Hong Kong and Chinese Markets React to US Strike
However, markets in mainland China advanced with gains for energy companies. The Shanghai Composite index picked up 0.7% to 3,381.58. In currency dealings, the U.S. dollar rose to 147.18 Japanese yen from 146.66 yen.
Currency Exchange Rates React to US Strike
The euro climbed to $1.1504 from $1.1473.
In conclusion, global markets appear to be taking a wait-and-see approach as investors watch Iran’s response to the US strike against nuclear targets in Iran. While some analysts predict a short conflict with minimal disruptions, others warn of potential consequences, including a severe disruption of oil transit through the Strait of Hormuz and significant price increases for oil and other goods.
