Middle East maelstrom
by
Crude oil prices spiked as much as 10% overnight following the outbreak of war in the Middle East. Joint U.S.-Israeli strikes on Iran on Saturday have elicited a significant response from Tehran that has brought traffic through the critical Strait of Hormuz to a virtual standstill. Prices have cooled slightly but remain elevated. Meantime, financial markets are getting their first chance to react to the escalating conflict, which has seen the killing of Iranian Supreme Leader Ali Khamenei and an ongoing wave of retaliation across the region.
MIDDLE EAST MAELSTROM
Global Brent crude prices initially topped $80 per barrel this morning to hit their highest level since January 2025, but have since fallen back to about $79 - still well shy of the $100 levels now routinely touted by many in the oil market as a possible destination if the conflict lasts several weeks. U.S. President Trump has indicated the campaign could last four weeks - potentially long enough to ensure that the effective closure of the Strait of Hormuz waterway causes significant stress to world supplies. A modest OPEC+ output boost in April will likely do little to ease supply issues, not least because producers in the region will struggle to export while navigation in the Gulf is disrupted.
Significantly for inflation watchers and interest rate markets, crude prices are now significantly positive year-on-year for the first time in more than a year. On top of another hot January inflation readout on Friday, the prospect of creeping energy prices further clouds the Federal Reserve's horizon, with markets no longer fully pricing in another rate cut until September.
Meantime, the picture for U.S. Treasuries is extremely complicated.
They had rallied significantly late last week on a mix of rumbling credit concerns, AI-related stock market hits and a safety bid on the risk of an Iran conflict. But the inflation risks associated with the crude spike have seen 2-year yields bounce back from three-year lows - reversing all of Friday's drop. The dollar is a big winner, as energy price concerns and worries about a wider regional conflict jolt the currencies of big energy importers Japan, China and Europe. Stocks have fallen further, but not excessively - with U.S index futures, as well as Asia and Europe's benchmarks, all down between 1% and 2%.
Chart of the day
Oil's 9% surge on Monday was more restrained than many had feared over the weekend, but the duration of what's now a widening regional conflict will be critical to how energy and wider financial markets react from here. At least 150 tankers have dropped anchor in Gulf waters, shipping data showed on Sunday, while three were damaged amid escalating Iranian retaliation to U.S.-Israeli strikes.
Today's events to watch
* U.S. S&P Global and ISM February manufacturing PMIs (9:45-10:00 a.m. EST)
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