As the Iran war rages on, historic oil price surge sends share markets into a spin
Key Takeaways
- Historic oil-price surge disrupted global share markets.
- Ongoing Iran conflict pushed oil prices sharply higher.
- Many traders dumped the TACO trade on Monday, reacting to increasing market unease.
Markets and Iran escalation
Since Donald Trump returned to office, traders pushed markets higher on hopes of an AI-powered economic miracle and the 'TACO trade' (Trump Always Chickens Out).
“For the past year and a bit, since Donald Trump came back into office, traders have pushed markets higher on the hopes of an AI-powered economic miracle and the TACO trade — Trump Always Chickens Out”
That shifted after Iran appointed Mojtaba Khamenei to replace his father, Ayatollah Ali Khamenei, as supreme leader, and the US president doubled down on his promise to destroy the regime.
Mr Trump posted on Truth Social that Iran 'is no longer the Bully of the Middle East' and instead 'THE LOSER OF THE MIDDLE EAST,' saying it will be hit very hard and could surrender or, more likely, completely collapse.
Those statements, combined with further attacks on oil and gas facilities, a continued blockage of the Strait of Hormuz, and Gulf producers scaling back output as storage tanks filled, unsettled traders.
Markets react to oil spike
Markets reacted with a historic one-day surge in crude oil — initially rising more than 20 per cent to $US111 a barrel and later pushing Brent crude futures to $US119.50, a jump of 29 per cent from last week's close.
The ASX 200 plunged more than 4.4 per cent to 8,457 points at its low, wiping as much as $135 billion from Australian stocks before mounting a partial recovery to finish 2.85 per cent lower at 8,599 points.
Other Asian markets were hit harder: Japan's Nikkei slumped about 7 per cent and Korea's KOSPI plunged about 8 per cent, at one point triggering circuit breakers.
Mr Trump's further Truth Social post — "Short term oil prices, which will drop rapidly when the destruction of the Iran nuclear threat is over, is a very small price to pay for U.S.A., and World, Safety and Peace. ONLY FOOLS WOULD THINK DIFFERENTLY!President DJT," — prompted additional share-price declines and another leg higher in oil.
Energy market risk warning
Analysts warned the economic fallout could escalate.
“For the past year and a bit, since Donald Trump came back into office, traders have pushed markets higher on the hopes of an AI-powered economic miracle and the TACO trade — Trump Always Chickens Out”
Rabobank's senior global strategist Michael Every said a critical mass of traders are starting to appreciate the "quite terrifying" threat and compared the situation to a combination of the 1973 post-Yom Kippur War oil shock, the 2022 Russia-Ukraine commodity shock, and the 2020-21 COVID supply chain shock.
He warned that the longer it goes on the more exponential the damage becomes.
MST Financial energy analyst Saul Kavonic said markets still expect some resumption of flows and de-escalation.
He said if that does not happen prices could require demand-destruction-driven pricing and that "$US150 [per barrel]-plus pricing is very much a scenario on the cards."
Energy and supply risks
The article highlights broader supply-chain risks beyond crude, pointing to dramatic moves in diesel, jet fuel, fertiliser, chemicals such as sulphur, and gases like helium, and warning those shifts threaten industrial and agricultural production and the physical supply chains that underpin AI's growth.
It notes that even if hostilities ended tomorrow, damage to oil fields, refineries and gas plants and the problem of full storage tanks mean disruption will be measured in months rather than days.
The article adds that markets price the future, so a speedy end could see prices drop quickly, but the duration of the disruption and the economic fallout remain uncertain.
The piece concludes that only time will tell whether investors betting Mr Trump will not wage a long war will "end up choking on their tacos."