Brent crude oil surged to its highest level since May on Thursday amid escalating conflicts in the Middle East that posed a threat to the global oil supply chain. Simultaneously, sharp declines in the shares of two major Wall Street companies, Alphabet and Tesla, dragged the U.S. stock market to its steepest drop in a month.
The S&P 500 retreated by 1.2%, heading towards its first consecutive weekly loss since March. The Dow Jones Industrial Average slipped by one percent, while the Nasdaq composite plummeted by 2.2%.
Stocks tumbled due to surging oil prices, which inflate costs for many businesses, diverting consumer spending towards fuel expenses. The price of a barrel of Brent crude, the global benchmark, surged by seven percent to reach $100.69 US.
The spike in oil prices was triggered by recent attacks on two Saudi oil tankers in the Red Sea, threatening a crucial route for oil transportation from the Middle East to global markets, including the Strait of Hormuz.
Highlighting the economic significance of the sea passage, U.S. President Donald Trump warned of “major military punishment” against the Houthi rebels in Yemen, supported by Iran, if the attacks persist.
Just a few weeks ago, Brent crude prices had dipped below $72 amid hopes of easing tensions with Iran, potentially reopening the Strait of Hormuz.
The surge in oil prices poses a risk of reigniting inflation, potentially prompting central banks to raise interest rates, which could slow economic growth and impact stock and investment prices.
The yield on the 10-year treasury bond rose to 4.69% from 4.67% the previous day and significantly higher than the pre-conflict level of 3.97%. This increase has already pushed long-term U.S. mortgage rates to nearly year-high levels.
As oil prices climb, gasoline costs tend to follow suit. The average price for a liter of gas in Canada stood at $1.802, up by 1.9 cents from the previous day’s average.
On Wall Street, companies with substantial fuel expenses experienced significant declines due to concerns about increased operating costs.
American Airlines saw an 8.4% drop, despite reporting stronger profits for the quarter, supported by increased airfares to offset rising fuel expenses. Southwest Airlines also fell by 6.2% despite exceeding analyst profit and revenue expectations for the quarter.
Tesla, a major market player, witnessed a 14.5% decline after reporting lower-than-expected profits for the quarter. Alphabet’s stock also dropped by 7.1% despite exceeding profit and revenue estimates, as investors expressed concerns over increased capital spending on AI investments.
The AI industry’s uncertainties have contributed to recent market volatility, impacting stock markets globally. European indexes experienced sharp declines as oil prices surged, with France’s CAC 40 falling by 1.6%. Conversely, earlier in the day, Asian markets, including South Korea’s Kospi, demonstrated strength with a 4.4% surge.
