The widening conflict in Iran is shaking financial and energy markets worldwide as tankers in a key shipping corridor are targeted and oil prices begin to soar, threatening to escalate the affordability crunch facing US voters.
The Dow Jones Industrial Average dropped roughly 530 points, or about 1% shortly after the open. The S&P 500 fell roughly 1.1%, and the Nasdaq composite index shed 1.4%. By midmorning, the markets had recovered some of the lost ground.
Gold prices popped about 2.25%. US Treasury yields rose in a telltale sign of mounting uncertainty, and the US dollar similarly strengthened.
Meanwhile, oil surged nearly 8%. Diesel prices soared even higher than oil, up 17%. Analysts said that will probably result in diesel price hikes at the pump this week of more than 20 cents per gallon (3.7 litres).
The size of the economic fallout hinges on how long fighting persists and whether there is any political or military stability in Iran in its aftermath, analysts say.
Airline stocks dipped as thousands of flights were cancelled around the globe. Shares of American Airlines fell roughly 5.6%, United Airlines about 4% and Delta Air Lines 2.6%.
Asian and European markets started to fall amid the turmoil, as traders in the United States braced for the stock market to open. Futures on the Dow Jones Industrial Average had dropped by more than 500 points early Monday, and Nasdaq 100 futures were also in sharp decline.
The key risk for the global economy – and President Donald Trump’s political fortunes at home – is a sustained disruption of shipping traffic in the Strait of Hormuz, through which roughly 15% of the world’s oil and 20% of its liquefied natural gas passes.
Ships have largely stopped moving through the strait after bombing attacks by Iran and its threats against vessels that defy its directive to stay away. The Iranian Revolutionary Guard Corps declared the strait effectively closed over the weekend.
“Commercial traffic has effectively stopped,” said a report from Windward Maritime AI, which tracks shipping traffic. At least four tankers across a 100-nautical-mile (185km) stretch of the strait and the Gulf of Oman have been attacked since the US and Israel assaulted Iran over the weekend. Major shipping firms, Windward wrote, “have all suspended Gulf transits, war risk insurance has been cancelled, and hundreds of vessels are now at anchor or adrift”.
If shipping through the strait does not resume quickly, analysts say, the result will be a sustained increase in global energy costs and a potentially sharp escalation of US petrol prices.
Barclays bank said in a note to investors, “Oil markets might have to face their worst fears on Monday”, predicting that the average price of Brent crude could hit US$100 ($168) a barrel “as the market grapples with the threat of a potential supply disruption amid a spiralling security situation in the Middle East”.
“The key question is when do vessels re-establish export flows,” Alan Gelder, senior vice president of refining, chemicals and oil markets at Wood Mackenzie, said in an email. The firm said prices will rise considerably more if traffic through the strait does not resume quickly. It also projects that oil could jump to more than $100 per barrel, a price that would jolt world economies.
“The most recent comparison is during the early days of the Russia/Ukraine conflict, when the fear of loss of Russian supplies drove the oil price to over US$125,” Gelder said.
Trump has struggled to lower costs for Americans and has made bringing down the price of gas a rallying cry for his administration.
If Trump cannot quickly secure the strait, he could find himself in the same predicament his predecessor, Joe Biden, faced after the invasion of Ukraine sparked a global energy panic: a political backlash from drivers suddenly struggling to cover the cost of filling their tanks.
For the past few months, average prices have stayed at or below US$3 ($5) for a gallon of regular gas. That is poised to change quickly. The question is whether the price hike can be contained to 10 or 20 cents or keep pushing up from there.
It all hinges on how much the cost of crude goes up and how long that price stays high. A barrel of Brent, which traded for under US$70 last week, was selling for US$78.40 in futures markets Monday morning. Western Texas Intermediate Crude, the key US benchmark, was up a similar percentage.
While analysts say the situation is volatile and an easing of hostilities could deflate prices, many agree at the moment with Wood Mackenzie’s assessment that oil could shoot above US$100 per barrel. If it were to stay there, the average cost of a gallon of regular could rise towards US$4.
The US standing as the world’s largest producer of oil better equips the country to absorb oil volatility than in the past, but it does not inoculate it from global shortages. Oil is a global commodity, and its prices in the US and everywhere else are driven by market forces. Presidents have few policy tools to protect US consumers from price shocks. Trump could ease the pressure by releasing oil from the Strategic Petroleum Reserve, but analysts say such an action would quickly be offset by the huge volume of crude choked off at the strait.
For now, the strait is effectively a no-go zone for tankers, increasing pressure on the Trump administration to find a resolution to the conflict quickly. A weekend pledge by the Opec+ consortium of oil-producing nations to modestly increase their output will also do little to help replace all the oil not flowing through it.
“Roughly one-fifth of global oil supply passes through the Strait of Hormuz, a vital artery for world trade,” Jorge León, a senior vice president of Rystad Energy, wrote in a research note Sunday. “Markets are more concerned with whether barrels can move than with spare capacity on paper.”
León said Rystad is bracing for oil prices to rise significantly this week unless there is a swift de-escalation of the conflict.
Marine tracking data shows commercial traffic on the strait plummeted by the end of the weekend. Insurers began withdrawing policies on tankers travelling through it, and commercial shipping companies said they would not be sending their vessels into the area until tensions eased.
Industry giant Maersk was among them.
“The safety of our crews, vessels and customers’ cargo remains our key priority,” the firm said Sunday. “We are suspending all vessel crossings in the Strait of Hormuz until further notice.”
Some industry experts say the markets may be overreacting, and they project prices will quickly stabilise. That is how things have played out during some other geopolitical conflicts in the past couple of years, including the military strikes on Iran’s nuclear arsenal in June, as well as the intermittent Houthi missile attacks on vessels sailing through the strait in response to Israel’s war in Gaza.
“A sustained closure of Hormuz would almost certainly provoke coordinated regional and US involvement to secure maritime passage,” Patrick De Haan, head of petroleum analysis for the pricing app Gas Buddy, wrote in a blog post. “Too many global economies depend on that corridor for it to remain blocked for long.”
He said that while oil markets are likely to swing wildly in the near term, “don’t mistake volatility for runaway prices. Volatility isn’t the same as a shortage.”
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