Brent climbed 17% to $108.77 a barrel, its biggest daily gain since the outbreak began in 2020 and on top of a 28% rise last week. U.S. crude rose 18% to $107.56, threatening to send gasoline prices skyrocketing.
Iran has named Mojtaba Khamenei as supreme leader to succeed his father, Ali Khamenei, in a sign that hardliners remain firmly in power in Tehran a week into a conflict with the United States and Israel.
It was unlikely to be welcomed by US President Donald Trump, who had declared his son “unacceptable”.
With no signs of an end to hostilities in the Middle East and tankers still not daring to cross the Strait of Hormuz, investors were bracing for higher energy costs for a long time. “The global economy is dependent on the concentrated flow of Middle Eastern oil and natural gas through the Strait of Hormuz,” noted Bruce Kasman, chief economist at JPMorgan.
“The near-term scenario is a near-term increase to $120 bbl and then moderate as the conflict subsides very quickly,” he added. “But in the absence of a clear and decisive political solution, Brent crude oil prices are expected to rise above $80 bbl by mid-year.”
Such an outcome could reduce global economic growth by 0.6% annually in the first half of this year, and raise consumer prices by 1% annually, Kasman said. He warned that a widespread and sustained conflict could send the price of oil above $120 a barrel and lead to a global recession.
It was all significant news for Japan, a major importer of oil and gas, which sent the Nikkei down 6.2%, on top of a 5.5% drop in the previous week.
South Korea’s high-flying market fell close to the ground with a 7.3% decline, having already fallen more than 10% last week.
The sell-off swept through Wall Street as S&P 500 futures fell 1.8%, while Nasdaq futures fell 2.1%. Across Europe, both EUROSTOXX 50 futures and DAX futures were down 2.5%.
Central banks are facing an inflationary crisis
In bond markets, the risk of rising inflation became more of a safe haven and the yield on the 10-year Treasury note rose 5 basis points to 4.189%, up from 3.926% just a week ago.
Interest rate futures also fell as investors feared the risk of higher inflation would make it harder for the Federal Reserve to ease policy, while disappointing jobs numbers argued for stimulus.
US consumer prices data on Wednesday are forecast to show a sustained 2.4% annual pace in February.
The Fed’s top measure of core inflation expires on Friday and is forecast to hold at 3.0%, well above the central bank’s 2% target, and analysts see the risk of an even higher number.
Energy-driven inflation risks have led markets to expect the next move in rates from the European Central Bank, which could be a hike as early as June.
For the Bank of England, markets moved to price in just a 40% chance of one facility versus two or more cuts prior to the start of the Middle East conflict.
Nervous investors are looking for dollar liquidity while net energy importers of currencies from countries including Japan and much of Europe.
“Asia is bearing the brunt of the sharp rise in oil prices and there are few places to run and hide,” said Vishnu Varathan, former head of Asia Japan Micro Research at Mizuho.
“The dollar should do well, given the exposure to Japan and Korea here and sharp pain that can be expected from Brent to $107.”
The dollar rose 0.4% to 158.45 yen, while the euro fell 0.8% to $1.1520. The Australian dollar, often sold as a hedge during market volatility, was down 0.9% at $0.6964.
Gold fell 2.4% to $5,047 an ounce, with traders speculating that investors should take profits to cover losses elsewhere in the metal’s long rally. (Reporting by Wayne Cole; Editing by Edmund Kleiman)
