Stocks set to plunge as oil spike after Iran strikes threatens higher gas, groceries and interest rates

Oil surged the most in four years on Monday as tanker traffic all but halted through the Strait of Hormuz and a major Saudi refinery stopped operations, raising fears of a fresh energy shock.

Brent crude jumped more than 8 percent, briefly topping $80 a barrel, in its biggest one-day rise since March 2022 – when Russia’s invasion of Ukraine sent oil prices soaring and fueled the inflation surge that hit households around the world for years.

The oil spike followed joint US and Israeli strikes on Iran over the weekend and Tehran’s retaliation across the region. 

US stock futures fell more than 1 percent across the Dow, S&P 500 and Nasdaq, airlines sold off in Europe and Asia, and investors piled into gold and the dollar.  Energy and defense shares rallied, while Wall Street’s volatility gauge climbed to its highest level of the year. 

The surge puts President Donald Trump in a delicate position. Soaring fuel prices became a major political liability for his predecessor Joe Biden. Gas at the pumps peaked at more than $5 a gallon in June 2022 after oil spiked.

High energy prices fed into broader inflation and became a centerpiece of Trump’s criticism during the 2024 campaign.

The White House will be keen to avoid any sustained spike and is likely to do all it can to keep the Strait – between Iran and Oman – open and energy flowing. 

In fact, hours before the strikes, Trump said on Friday: ‘Slashing energy costs is among the most important actions we can take to bring down prices for American consumers.’ 

Ships began avoiding the Strait, the narrow waterway between Iran and Oman that carries roughly one-fifth of the world’s oil and a similar share of liquefied natural gas. 

At least four vessels were reportedly targeted on Sunday, and Bahrain said a ship was on fire in one of its ports. Insurers have warned premiums could rise sharply for ships entering the Gulf.

How quickly tanker traffic resumes through Hormuz is now the key question for energy markets. JPMorgan estimates that a halt lasting 25 days would fill producer nations’ storage tanks and force production cuts. 

If oil prices stay high, Americans could face rising costs for fuel, groceries, flights and everyday goods, along with delayed interest rate relief.

Brent crude – the global benchmark – had closed Friday at about $72 a barrel, already up nearly 20 percent this year amid fears of conflict. 

Citigroup expects prices to trade in the $80 to $90 range over the coming week. Morgan Stanley raised its second-quarter forecast to $80 from $62.50.

But if flows through the Strait are not restored quickly, oil could exceed $100 a barrel, according to Wood Mackenzie and Barclays.

Ajay Parmar, director of energy and refining at ICIS, also said oil could ‘perhaps exceed that level if we see a prolonged outage of the Strait.’

Even with OPEC+ agreeing over the weekend to increase output next month, extra supply would offer little relief if crude cannot leave the Gulf.

Iran produces about 3.3 million barrels a day — roughly 3 percent of global supply — but its influence is far greater because most oil from the Persian Gulf must pass through Hormuz to reach major markets.

Closing the Strait outright would be tricky. But Iran does not need a total shutdown to rattle markets.

Missile strikes, mining threats, insurance blowouts and ships diverting away from the Gulf could slow traffic enough to lift prices significantly.

Almost 20 million barrels of oil pass through the Strait daily, much of it from Saudi Arabia and other Gulf producers. There is no other way to get most of that crude to the rest of the world.

‘Sharply higher global oil prices can inflict pain on US consumers and corporate America,’ said James Knightley, US economist at ING.

Even though the US imports a smaller share of its energy than in past decades – about 17 percent in 2024 – gasoline and diesel prices still track global benchmarks.

If oil rises and stays there, drivers will feel it at the pump. The national average gasoline price is about $2.98 a gallon but oil at $100 for a few months would drive that up.

The impact would not stop at the gas station. Oil is needed for transportation, shipping, manufacturing, packaging and agriculture. Higher crude prices raise costs for trucking groceries, flying passengers, producing plastics and moving goods around the country.

Capital Economics estimates that oil at $100 a barrel could add roughly 0.6 to 0.7 percentage point to global inflation. One estimate suggests US inflation, recently running near 2 to 3 percent, could move back above 4 percent if crude surged and remained elevated.

That would complicate the Federal Reserve’s plans. Rising prices could delay interest rate cuts or even force them to be increased – affecting mortgages, credit cards and auto loans.

Economic growth would also take a hit. Analysts estimate that every sustained $10 rise in oil prices can shave 0.1 to 0.2 percentage point off growth over the following year.

Wall Street is worried about combination of higher inflation and slower growth, and the threat can hit stock prices.

There are factors that could limit the damage. OPEC+ agreed on Sunday to increase production by 206,000 barrels a day from April in an attempt to stabilize markets. Saudi Arabia and the United Arab Emirates have pipelines that bypass the Strait for some exports. China has also built up oil stockpiles in recent years.

Oil prices in the coming days will depend on whether shipping through the Strait resumes normally or remains heavily disrupted.