Oil prices surge, stocks skid in flight from risk

Oil prices rose on Monday and stocks fell as military conflicts in the Middle East appeared to be drawing to a close in recent weeks, causing investors to flock to the relative safety of the dollar, gold and bonds.

Brent rose 7.5 per cent to US$78.34 ($A110.26) per barrel, while US crude rose 7.3 per cent to US$71.88 ($A101.17) per barrel. Gold rose 1.5 per cent to US$5,358 ($A7,541) an ounce.

While US and Israeli military attacks on Iran show no signs of abating, the Arab country has responded with missile bombardments across the region, risking dragging its neighbors into conflict.

President Donald Trump suggested to the Daily Mail that the conflict could continue for another four weeks, while the attacks would continue until US targets were reached.

All eyes were on the Strait of Hormuz, through which about one-fifth of the world’s seaborne oil trade and 20 percent of liquefied natural gas passes. Although the vital waterway has not yet been closed, maritime monitoring sites have shown tankers piled up on either side of the strait, wary of attack or unable to obtain insurance for the voyage.

“The most immediate and concrete development affecting oil markets is the effective halt of traffic in the Strait of Hormuz, thus preventing 15 million barrels per day (bpd) of crude oil from reaching markets,” said Jorge Leon, head of geopolitical analysis at Rystad Energy.

“Unless signals of de-escalation emerge quickly, we expect a significant upward repricing of oil.”

A prolonged rise in oil prices risks reigniting inflationary pressures globally, while also acting as a tax on businesses and consumers that could reduce demand.

OPEC+ agreed on Sunday to a modest 206,000 barrel-per-day increase in oil production for April, but much of that product must leave the Middle East by tanker.

“The closest historical analogue, in our view, is the Middle East oil embargo of the 1970s, which increased oil prices by 300 percent to around US$12 ($A17)/barrel in 1974,” said Alan Gelder, Wood Mackenzie’s senior vice president of refining, chemicals and oil markets.

“This translates to just US$90 ($A127)/barrel in terms of 2026. In today’s market, eclipsing this seems very achievable due to concerns about significant supply losses.”

That means it will be expensive for Japan, which imports all its oil, causing the Nikkei index to fall 2.3 percent, while its airlines were hardest hit. South Korea lost 1.0 percent after a rapid increase so far this year.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.6 percent.

In Europe, EUROSTOXX 50 futures fell 1.9 percent and DAX futures fell 1.8 percent. On Wall Street, S&P 500 futures and Nasdaq futures lost 1.1 percent.

The oil shock rippled through foreign exchange markets, with the dollar being the main beneficiary. The US is a net exporter of energy and Treasuries are still considered a liquid haven in times of stress, and the euro fell 0.4 per cent to US$1.1768 ($A1.6563).

While the Japanese yen is generally a safe haven, the country imports all of its oil, making the flow more bidirectional. The dollar rose 0.3 percent to 156.55 yen, rising sharply against the Australian dollar, which is often sold as a liquid indicator of global risk.

In bond markets, 10-year Treasury yields fell 2 basis points to 3.926 percent, a three-month low; Last week it fell below 4.0 percent for the first time since late November.

Bonds had risen on Friday, when UK mortgage lender MFS was placed into administration following allegations of financial irregularities. Its collapse fueled wider credit fears, with well-known big banks among its lenders. MFS had borrowed 2 billion pounds (A$3.79 billion).

The news weighed on banking stocks and combined with jitters over AI-related stocks to impact Wall Street more broadly.

Investors will also have to weather the storm of US economic data this week, including the ISM’s survey on manufacturing, retail sales and the ever-vital payrolls report.

Any weakness could shake confidence in the economy after a disappointing fourth quarter, but it could also narrow the chances of a rate cut by the Federal Reserve.

Markets currently point to a 53 percent chance of easing in June and around a 60 basis point cut this year.