Brent crude oil surged to its highest level since May on Thursday due to escalating conflicts in the Middle East, posing a threat to the global crude supply. Concurrently, plunges in the stock prices of influential companies like Alphabet and Tesla dragged down the U.S. stock market, marking its steepest decline in a month.
The S&P 500 declined by 1.2%, potentially facing its first consecutive weekly loss since March. The Dow Jones Industrial Average fell by 1%, while the Nasdaq composite dropped 2.2%.
Rising oil prices added pressure on stocks as businesses incurred higher costs and consumers diverted funds to cover increased fuel prices. The price of a barrel of Brent crude oil, the global benchmark, surged by seven percent to settle at $100.69 US, touching $102, the highest level since May for the most actively traded Brent contract.
The spike in oil prices was triggered by attacks on two Saudi oil tankers in the Red Sea, jeopardizing a key route for oil transportation from the Middle East to global customers, alongside the Strait of Hormuz.
President Donald Trump threatened severe military consequences against the Houthi rebels in Yemen, supported by Iran, if ship attacks persist. This development follows a recent drop in Brent crude prices to below $72, reflecting hopes of easing tensions with Iran and reopening the Strait of Hormuz.
The surge in oil prices could reignite inflation, prompting central banks to consider raising interest rates, potentially slowing economies and impacting stock and investment prices. Consequently, the yield on the 10-year treasury bond rose to 4.69%, up from 4.67% the previous day and significantly higher than the pre-war level of 3.97%, leading to elevated U.S. mortgage rates.
With the correlation between oil and gasoline prices, the average cost of a liter of gas in Canada reached $1.802, up by 1.9 cents from the previous day. On Wall Street, companies heavily reliant on fuel experienced notable declines amid concerns over increased operational expenses.
American Airlines saw an 8.4% decrease despite reporting better-than-expected profits, attributing the decline to heightened airfares offsetting increased fuel costs. Southwest Airlines also reported improved profits and revenue but saw a 6.2% drop in its stock price.
Tesla’s stock plummeted by 14.5% following lower-than-expected quarterly profits, impacting the S&P 500 due to its significant market value. Similarly, Alphabet’s stock fell by 7.1% despite exceeding profit and revenue expectations, with investors focusing on the company’s increased AI investments.
Alphabet’s augmented capital spending forecast and robust cloud revenue growth raised concerns about the profitability of such investments. The uncertainty surrounding AI technology investments has contributed to market volatility in recent weeks.
Overseas, European stock indexes experienced sharp declines amidst surging oil prices, with France’s CAC 40 dropping by 1.6%. In contrast, Asian markets, including South Korea’s Kospi, initially displayed strength earlier in the day.
In summary, the global economic landscape faces challenges stemming from geopolitical tensions, escalating oil prices, and market reactions to corporate performance and investment decisions.