As tensions in the Middle East escalated, oil prices rose to above $90 per barrel. US stocks also fell.
Brent crude and futures both rose by 1.5 percent on Thursday, reaching $90.65 per barrel. This is the highest price since October. Traders were weighing the possibility of Iran’s reaction to a suspected Israeli strike on its consulate at Damascus.
The blue-chip S&P 500 index on Wall Street closed down 1.2 percent, the sharpest drop since February’s middle, while the tech heavy Nasdaq Composite dropped 1.4 percent.
Steve Englander of Standard Chartered, New York, said that fears the war between Israel & Hamas could turn into a broader conflagration sparked a rush to assets considered as less risky than stock.
He said that the rush to safe-haven assets was a classic one, noting how US Treasuries prices, which are generally considered risk-free by many, rose as stocks fell.
Englander continued, “Even the Japanese currency, the , is performing well. It takes a great deal for it to be doing well in these days.” He was referring to , the , under pressure currency of the country.
Peter Tchir, the head of macro-strategy at Academy Securities, echoed his thoughts. After headlines about an increase in violence in the Middle East, there was a flight for safety. Crude prices spiked, and investors rushed to Treasury bonds.”
The stock market’s decline coincided closely with the speech of Neel Kazhkari, President of the Federal Reserve Bank of Minneapolis. Kashkari suggested that US interest rate may not drop as much this year as expected. He said that if US inflation continued “sideways”, it would cause him to question the need for rate cuts.
Analysts were uncertain about the impact of Kashkari’s comments, given that he is not a member of the Fed’s interest rate policy committee this year. The US dollar index which moves with expectations of interest rates was unchanged for the day.
Subadra Rajappa is the head of US Rates Strategy at Societe Generale. She said that Thursday’s movements “were more about geopolitical tensions, and caution before tomorrow’s US Jobs Report”.
Bloomberg data shows that oil prices have exceeded analysts’ median predictions of $83 per barrel for the current quarter as global demand is growing while Saudi Arabia and its Opec+ allies are limiting supply.
Giovanni Staunovo is a commodity analyst with the Swiss bank UBS. He said that the recent price rise was driven by renewed geopolitical conflicts in the Middle East. But fundamentals such as better than expected oil demand and lower production also played a role.
Oil prices are surging, complicating central bank efforts to curb rising prices. The news comes just a day after Federal Reserve Chair Jay Powell declared that the bank’s fight against inflation is “not yet over”.
Staunovo stated: “Higher prices for energy could be a concern to financial markets, if they delay further the lowering of interest rates by central banks.”
In response to the rising prices, the US Department of Energy announced on Wednesday that it would cancel its latest plans to buy oil to replenish the nation’s stockpile of emergency crude. In recent years, the Strategic Petroleum Reserve was depleted to compensate for shortfalls caused by Russia’s invasion of Ukraine.
The increase in crude oil prices has led to an increase in petrol prices, ahead of summer driving season which begins next month. As the November presidential election approaches, this increase has caused increasing concern at the White House. Washington warned Ukraine recently to stop strikes against Russian oil refineries, for fear that it would fuel the price increase.