- Oil prices surge above $118 amid escalating Middle East conflict.
- Asian stock markets fall sharply as investors move to safe assets.
- Strait of Hormuz disruption raises fears over global energy supply.
- Analysts warn sustained oil above $100 could pressure global economy.
As tensions intensified in West Asia, crude oil prices soared to multi-year highs on Monday Jenny provoking a serious crash in the Asian equities market, and triggering a massive risk-off flight across the global financial markets.
The sudden increase in oil price was accompanied by further animosity within the United States, Israel and Iran with potential of having extended and debilitating effects in terms of interruption of international energy sources.
Already anxious about the farfetched technology valuations and increasing expenditure on artificial intelligence infrastructure, investors scrambled to trim exposure to equities at the start of markets throughout the area.
The U.S. benchmark or West Texas Intermediate (WTI) rose up to 30 percent to hit a high of $118.88 per barrel, and Brent crude rose to 118.73. Reuters data suggested that WTI was trading at approximately $116.00 a barrel or 27.6 percent higher compared to the last session and Brent was at 116.27, an increase of 25.5 percent.
Since the beginning of the conflict on February 28, the price of the Brent crude has risen by over 60 percent and WTI prices by over 75 percent due to a growing concern regarding interference with the global energy supply systems.
Energy markets have been especially receptive to the Strait of Hormuz events, a strategic sea route of which up to one-fifth of the global oil and liquefied natural gas flows go through. Hostilities between the two countries have led to a stalling of maritime traffic in the strait.
Markets Tremend over Shocking Oil Supply
The reports of attacks on oil fields at northern Kurdistan and southern Iraq have created fears of supply. One of the U.S.-run oilfields was put to a standstill after protests in the region, and the United Arab Emirates and Kuwait have begun cutting production.
The crude price explosion soon took its toll on the equity markets of Asia to some extent forcing investors to adopt defensive stands.
Kospi index of South Korea declined 7.9 percent to 5,141.76 and the Japanese index, the Nikkei 225 declined 7.0 percent to 51,740.46. The Taiwanese stock market also fell below 5%.
Hong Kong Hang Seng index fell 3.2 to 24, 926.62 and Shanghai Composite of mainland China dropped 1.3 to 4, 070.90, according to Reuters data.
S sharp declines occurred also in other regional markets such as Sydney, Singapore, Manila and Wellington where energy shock was felt surrounding the world financial markets.
The selling out spanned into Asia. Futures which were linked to the three key indexes in Wall Street experienced a decline of over 2 percent indicating that the U.S equities were going to continue losing.
There was also increased risk aversion in currency markets. The U.S. currency was becoming strong against major currencies as investors looked into safe-haven assets.
Reuters data shows that on Friday, the euro depreciated to $1.1520 as compared to the previous level of $1.1604 while the British pound dropped to $1.3298 versus before which was at 1.3385. Japanese yen was weaker in relation to the dollar and remained at 158.70 as opposed to 157.88 before.
Concerns on Inflation Re-appear
The oil boom has brought back worries that the world is experiencing inflation when central banks should be starting to slow down the monetary policy later in the year.
The increased energy prices would make such plans complicated by pushing the consumer prices up and the cost of production up in most industries.
Stephen Innes, the managing partner at SPI Asset Management, stated that what the market was experiencing was a real-disruption in supply and not a temporary shock.
"The supply side knows no bounds and the shock is spreading up and down the production chain, said Innes."
Gulf producers are reducing production due to the filled storage hubs and the export flows are getting into their own. Qatar has also stopped the liquefaction of some of its major gas production units, culminating a move that will take weeks to undo even when the war takes a back seat the next day.
He cautioned that oil prices at above 100 barrels may be a big burden to the world economy.
What this means is that the market is not actually dealing with a headline shock. It is concerned with a physical interference with oil molecules, Innes said.
"Oil above 100 is not a commodity rally. It amounts to a tax on the world economy."
Bad U.S. economic news already put the global markets under pressure towards the end of last week with questions of slowing growth on top of this.
Reuters reported that this is against expectation since the U.S. economy has lost jobs in February as unemployment rates move towards higher levels. There were also separate data which pointed to a decline in the retail sales a reason which casts doubt on consumer spending momentum.
Investors Prepare to face More Volatility
U.S President Donald Trump recognized the oil prices surge but claimed that it would be short-lived.
Trump posted on social media, "A very small price to pay U.S.A., and World, Safety and Peace, is short term oil prices, which will even tumultuously fall once the completion of the Iran nuclear danger.
Strategists in the market warned, however, that the caution of investors might persist until more indications are made that the conflict is stabilizing.
Michael O -Rourke, the chief market strategist of JonesTrading, told the market response that it had yet to run its course.
In his view, O'Rourke stated that the worst has not yet reached the stock market reaction.
I would expect overall more of a mood of risk-off before we see any concrete positive news.
The most energy-intensive industries like airlines, shipping and manufacturing will be under the most pressure in case the crude prices are still high.
The Reuters reported that shipping companies have already companies are rerouting ships outside of conflict zones and this might also have the effects of raising transportation expenses and unravelling supply chains.
Financial markets are still keen on developments in the Middle East where the conflict is now in its second week with investors keeping a keen eye on whether the tension would continue to rise or the tensions would start yielding to diplomatic interventions.
