Introduction: Oil Surges Over $100 a Barrel in Frenzied Trading
Good morning, and welcome to our continuous coverage of business, financial markets, and the global economy.
Stock markets are sharply declining today following the oil price surge above $100 a barrel for the first time in four years.
Crude prices soared last night as Asia-Pacific financial markets opened for the new week, with US crude and Brent crude both approaching $120 a barrel amid frenzied trading.
Oil price is now approximately $110. Once in a lifetime you see a surge like this in 20 minutes. pic.twitter.com/nmhrkn6dmr
Oil is on track for its largest daily increase since the Covid-19 pandemic turmoil, following strikes in and around Tehran that prompted heightened tensions in the Iranian capital.
Kuwait’s national oil company announced a precautionary production cut amid retaliatory attacks by Iran, and reports indicate that output from Iraq’s main southern oilfields has fallen by 70%.
Traders are betting that the Middle East conflict will cause supply disruptions, pushing oil prices higher and threatening an inflationary surge that could harm economies worldwide and exacerbate the cost of living crisis.
The stock market reaction has been severe this morning. Japan’s Nikkei has fallen nearly 5%, South Korea’s Kospi has dropped 6.5%, and Australia’s S&P/ASX 200 has declined by 2.85%.
European and US stock markets are also expected to open lower.
Ipek Ozkardeskaya, senior analyst at Swissquote, notes that hopes for peace have diminished after Mojtaba Khamenei, the second son of the late Iranian supreme leader, was appointed as his successor.
The choice suggests that Iran will not back down to the US, and that means a potentially prolonged war in the Middle East – which is home to about 50% of global oil reserves and around 40% of the world’s natural gas reserves.
About 20% of the world’s oil and LNG flows through the Strait of Hormuz, which is currently closed, making it one of the most critical energy chokepoints in the global economy.
The Agenda
12.30pm GMT: G7 members and International Energy Agency (IEA) to hold a call to discuss the impact of the Iran war.
2pm GMT: Eurozone finance ministers to hold a Eurogroup meeting.
FTSE 100 Tumbles
The London stock market opened with shares tumbling.
The FTSE 100 index of blue-chip shares has dropped by 179 points, or 1.75%, to 10,106 points, marking its lowest level since mid-January as the Iran conflict erases most of this year’s gains.
Mining stocks such as Anglo American (-6.2%) and Antofagasta (-5%) are among the decliners, alongside Rolls-Royce (-5%), whose jet engine business is expected to suffer from reduced travel.
Research indicates that surging oil prices disproportionately impact poorer populations.
As our economics editor Heather Stewart wrote yesterday:
Recent research published by economists at the University of Massachusetts Amherst identified energy, along with food and agriculture, as among the commodities that had “a disproportionate capacity to increase inequality when their prices rise”.
Where there are benefits, these are narrowly shared. Another striking recent paper showed that after the 2022 oil price surge in the US, 50% of the windfall benefit from higher prices in the sector went to the wealthiest 1% of individuals, via the stock market. The bottom 50% of people received only 1%.
Countries that are net importers of oil, such as the UK, are clear losers from higher energy prices.
Bank of England Certain to Leave Rates on Hold This Month, Money Markets Indicate
Any remaining hope that the Bank of England might cut interest rates this month has been eliminated by the surge in oil prices.
Money markets indicate a 99% probability that the BoE will keep rates on hold at its next meeting on 19 March.
Before the Iran conflict began, a rate cut had an 80% chance, but policymakers are now expected to wait and observe how the situation develops.
Looking ahead, markets suggest the Bank is more likely to raise rates than cut them this year, pricing in a 15 basis points (0.015 percentage points) increase to Bank Rate by December.
European gas prices are also surging this morning due to the slowdown in Middle East production.
The UK month-ahead gas price has jumped 19% to 163p per therm.
The continental European month-ahead benchmark is up 16% at €62 per Megawatt hour.
More evidence of UAE oil and gas production slowing down. No visible flare since 7 March. pic.twitter.com/b1BLI7dwY3
The pound is weakening against the US dollar as investors seek safe-haven assets this morning.
Sterling has dropped by three-quarters of a cent to $1.3337.
Ray Attrill, head of FX strategy at National Australia Bank, commented:
The U.S. dollar is finding no shortage of support from traditional haven considerations and obviously, the United States’ net energy exporter status in sharp contrast to most of Europe.
Donald Trump’s assertion that the surge in oil prices is “a very small price to pay” has contributed to the perception that neither side is showing signs of de-escalation, according to Jim Reid, market strategist at Deutsche Bank, who added:
Another important thing from the weekend is that we saw oil infrastructure targeted by both sides. This is an escalation from last week where this was, on the whole, avoided.
Markets Slump After Iran War Takes 'A Turn for the Worse'
Optimism among some investors that the Iran conflict might end quickly has been dashed by further escalation over the weekend.
Mohit Kumar, economist at investment bank Jefferies, said there had been complacency regarding the geopolitical impact, but now there is “some forced selling as investors reassess their positions.”
Kumar told clients that the war has “taken a turn for the worse over the weekend”:
Bombing of oil depots in Iran not only sent oil prices surging but also shows the shift in war strategy. Qatar indicated that war will force Gulf countries to stop energy exports within weeks. The attack on the desalination plant suggests that the human cost of the war is likely to increase over the coming days. Iran has confirmed Mojtaba Khamenei as its new Supreme Leader, a move that is unlikely to be acceptable to the US. Iran increased its missile attacks over the weekend, though some reports suggest it may limit attacks on other Gulf countries. The Financial Times reported that G7 countries may discuss emergency oil reserve releases to help with oil prices.
Kumar added that the appointment of Mojtaba Khamenei as the new Supreme Leader indicates Iran’s willingness to continue the war and that negotiations will be difficult.
Japan Considering Steps to Cushion Economy from Iran Conflict, PM Takaichi Says
Japan’s Prime Minister Sanae Takaichi stated that her government is considering measures to mitigate the economic impact of rising fuel costs caused by the Middle East conflict, including curbing gasoline prices.
Speaking to the Tokyo parliament, she said:
Many people are worried about rising gasoline prices.
Taking this into account, the government has been considering since last week what steps it can take.
We’re considering steps to avoid gasoline prices from rising to levels intolerable for the public.
Takaichi added that such measures could be funded by tapping government reserves.
G7 to Discuss Joint Release of Emergency Oil Reserves; Oil Slips Back
Oil prices have retreated from earlier highs following reports that G7 countries will discuss a potential joint release of emergency oil reserves later today.
According to the Financial Times, G7 finance ministers will hold a call at 8.30am New York time (12.30pm UK time) with the International Energy Agency to discuss the Iran war’s impact.
Three G7 countries, including the US, have so far expressed support for the idea, according to people familiar with the talks. The 32 members of the IEA hold strategic reserves as part of a collective emergency system designed for oil price crises.
One person said some US officials believe a joint release in the range of 300 million to 400 million barrels — 25 to 30 percent of the 1.2 billion barrels in the reserve — would be appropriate.
This development has helped to somewhat ease panic in energy markets. Brent crude is now trading at $106.73 a barrel, having peaked at $119.50 earlier this morning, but still up 15% today.
Trump: It's a Very Small Price to Pay
US President Donald Trump claimed that the “short term” rise in oil prices is a “very small price” to pay for peace.
Posting on his Truth Social platform as the war with Iran entered its tenth day, Trump wrote:
Short term oil prices, which will drop rapidly when the destruction of the Iran nuclear threat is over, is a very small price to pay for U.S.A., and World, Safety and Peace. ONLY FOOLS WOULD THINK DIFFERENTLY! President DJT
