West Texas Intermediate crude closed above $99 per barrel on Monday as the US naval blockade of Iranian ports took effect at 10am Eastern Time, reinstating the energy market anxiety that had briefly subsided during last week’s ceasefire rally.
The day’s session illustrated in compressed form the uncomfortable reality facing global economies: the geopolitical situation is far more volatile than equity market pricing has sometimes suggested.
The blockade adds a second layer of restriction to a waterway already under significant constraint. Iran has been limiting commercial transit since the war began in February, and now US forces are blocking traffic to Iranian ports from the opposite direction.
Approximately 230 loaded oil tankers remain trapped inside the Gulf, unable to access export routes, and the International Energy Agency had already warned that the emergency oil reserves released in March were running dry in mid-April.
For central banks attempting to hold inflation near target, the oil price trajectory creates a direct complication. The March US consumer price index showed a 3.3 percent annual rate, driven primarily by energy costs, and the trajectory since then has done nothing to suggest relief is imminent. The 10-year Treasury yield climbed three basis points to 4.34 percent on Monday as traders reassessed the likelihood of Federal Reserve rate cuts, with the dollar index reaching nearly 99 as higher oil prices reinforced a hawkish reading of the policy environment.
Airlines and cruise operators — which staged spectacular recoveries during last week’s ceasefire rally — reversed course on Monday, with Delta, United, Southwest and American all falling more than two percent as jet fuel costs returned to the forefront of operational forecasts. Delta CEO Ed Bastian had already flagged plans to reduce near-term capacity growth before this latest escalation.
The partial recovery in equities toward the close provided some comfort but masked the persistent structural concern: oil at sustained levels above $95 represents a meaningful inflation and growth headwind that bank earnings calls this week are unlikely to be able to simply talk around.
