The stakes couldn’t be higher for the oil market.
As the Trump administration pursues peace talks with Iran while amassing additional troops nearby, traders warn that each day the conflict goes on will exacerbate the energy shock and thrust the global economy as well as stocks and bonds into further peril.
Here is how the rupture stacks up against past shocks.
Tanker traffic through the Strait of Hormuz, a chokepoint for roughly 20% of the 100 million barrel a day oil market, has slowed to a trickle. While Saudi Arabia has rerouted some supplies through existing pipelines to export terminals elsewhere, analysts including Rapidan Energy Group say 10 million or more barrels of petroleum a day remain throttled.
Threats to oil tankers and shut-ins at major production facilities could extend the impacts on both oil and natural gas far beyond the end of the conflict. Unlike in previous shocks, some of which lasted months or longer, Saudi Arabia and other major crude-oil exporters have a limited ability to step up spare production capacity while the strait is effectively closed.
Benchmark global oil futures have catapulted around 80% higher since the start of the year, even after reports of Washington’s negotiations with Iran sparked a steep selloff. The surge since drones and missiles started flying in recent weeks has been in line with the period after the start of the Gulf War in 1990.
Oil prices were much higher before Russia’s full-scale invasion of Ukraine in 2022, when the global economy was snapping back from the pandemic. Although much of the expected disruption to crude supplies that year never materialized, prices remained elevated for months.
While the market selloff seems steep, it is on par with reactions to past geopolitical shocks. The S&P 500 had retreated before the current war owing to fears that artificial intelligence could upend software, financial services and more. Investors say rich valuations in the U.S. stock market have exacerbated some of the volatility since then
By this point after Russia’s full-scale invasion of Ukraine, the broad index was roughly level from when the conflict began. But the shock exacerbated inflation, which ultimately dinged earnings, boosted borrowing costs and led the index to pull back 21% in the first half of 2022.
Before Russia’s full-scale invasion of Ukraine in 2022, yields were low while the Federal Reserve tried to jump-start the economy following the pandemic. This time around, an unclear outlook for interest rates meant yields were already elevated. They have since climbed to some of their highest levels since July.
The benchmark 10-year Treasury yield rose faster after Iraq’s 1990 invasion of Kuwait, when the U.S. was far more energy-dependent.
The U.S. pledged to contribute a huge share—some 172 million barrels of oil—to the largest-ever release of crude reserves by members of the International Energy Agency. That drawdown of oil held in a network of salt caverns near the U.S. Gulf Coast would be slightly smaller than the emergency release authorized by President Joe Biden in 2022 during the war in Ukraine.
Both releases are large by historical standards, a sign of how Washington has become more aggressive in its use of strategic stockpiles to respond to price shocks or prepare for economic threats.
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