Brent crude oil prices surged to their highest level since May on Thursday due to escalating conflicts in the Middle East that threatened to disrupt the global oil supply chain. Concurrently, significant declines in the shares of two major Wall Street companies, Alphabet and Tesla, led to the U.S. stock market experiencing its most substantial drop in a month.
The S&P 500 declined by 1.2%, marking its potential first consecutive weekly loss since March. Similarly, the Dow Jones Industrial Average plummeted by one percent, while the Nasdaq composite sank by 2.2%.
Rising oil prices exerted pressure on stocks as they increase operational costs for many businesses, redirecting consumer spending towards higher fuel prices. The price of a barrel of Brent crude oil, the global benchmark, surged by seven percent to reach $100.69 US.
This increase was attributed to recent attacks on two Saudi oil tankers in the Red Sea, posing a threat to the transportation of crude oil from the Middle East to global markets, including through the vital Strait of Hormuz.
Recognizing the economic significance of this sea route, U.S. President Donald Trump warned of “major military punishment” against the Iranian-backed Houthi rebels in Yemen if they continued their assaults on ships.
Just a few weeks ago, Brent crude prices had dipped below $72, reflecting optimism that tensions with Iran would ease and fully reopen the Strait of Hormuz.
The surge in oil prices has the potential to reignite inflation pressures, prompting central banks to consider raising 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%, up from 4.67% the previous day and a significant increase from the pre-war level of 3.97%. This uptick has contributed to pushing long-term U.S. mortgage rates to their highest levels in nearly a year.
With oil prices on the rise, gasoline prices are also expected to increase. The average price per liter of gas in Canada stood at $1.802, representing a 1.9-cent rise from the previous day’s average.
On Wall Street, companies with substantial fuel expenses experienced notable declines amid concerns about escalating costs. American Airlines saw an 8.4% drop, despite reporting better-than-expected profits, as it raised airfares to offset increased fuel costs.
Southwest Airlines also reported improved profits and revenue but witnessed a 6.2% decline in its stock price. Tesla, a major player in the S&P 500, suffered a 14.5% decline following lower-than-expected quarterly profits. Similarly, Alphabet’s stock tumbled by 7.1% despite surpassing profit and revenue expectations.
Investor focus shifted to Alphabet’s increased spending on artificial intelligence (AI) investments, raising questions about the potential returns on these investments. Concerns surrounding AI investments have led to market volatility in recent weeks.
Amidst the global stock market turmoil, European indexes experienced significant losses as oil prices surged, with France’s CAC 40 dropping by 1.6%. In contrast, Asian markets, including South Korea’s Kospi, showed strength earlier in the day.