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Oil prices rose above $90 a barrel and U.S. stocks tumbled as rising tensions in the Middle East rattled markets.
Brent crude futures rose 1.5 percent on Thursday to close at $90.65 a barrel – the highest closing price since October – as traders weighed the possibility of a backlash from Iran following a suspected Israeli attack on its consulate in Damascus.
Wall Street's blue-chip S&P 500 stock index closed 1.2 percent lower, its biggest daily decline since mid-February, while the tech-heavy Nasdaq Composite fell 1.4 percent.
Steve Englander, head of macro strategy at Standard Chartered in New York, said fears that the war between Israel and Hamas could lead to a major conflagration have simultaneously sparked a rush into assets considered less risky than stocks.
“It's a classic safe-haven rush,” he said, noting that prices of U.S. Treasury bonds, widely considered risk-free, rose amid the stock sell-off.
“Even the Japanese yen is doing well, and it takes a lot for the yen to do well these days,” Englander added, referring to the country's under-pressure currency.
His thoughts were echoed by Peter Tchir, head of macro strategy at Academy Securities. “After the headlines about an escalation in the Middle East, there was a flight to safety. Crude oil prices rose and investors rushed into government bonds.”
The stock market decline coincided with a speech by Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, who suggested that U.S. interest rates may not fall this year as widely expected. If U.S. inflation continues to “move sideways, I would question whether we even need to do these rate cuts,” he said.
However, analysts were unsure what impact Kashkari's comments will have on the market since he does not have voting rights on the Fed's interest rate policy panel this year. The U.S. dollar index, which tends to move with interest rate expectations, was unchanged on the day.
“[Kashkari’s] Comments would not lead to a rally in bonds,” said Subadra Rajappa, head of U.S. interest rate strategy at Société Générale, adding that Thursday's moves “have more to do with geopolitical tensions and caution ahead of tomorrow's U.S. jobs report.” .
Oil prices smashed through analysts' average forecast of $83 a barrel for this quarter as global crude demand rises while the Saudi-led Opec+ alliance restricts supply, according to Bloomberg data.
Giovanni Staunovo, commodities analyst at Swiss bank UBS, said: “We believe the recent price rise is due to renewed geopolitical tensions in the Middle East, but fundamentals such as better-than-expected demand and lower oil production have also helped.”
The rise in oil prices is complicating central banks' efforts to contain rising prices. It comes a day after Federal Reserve Chairman Jay Powell said the bank's fight against inflation was “not done yet.”
Staunovo said: “Higher energy prices could become a problem for financial markets if they further delay the start of interest rate cuts by key central banks.”
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The U.S. Department of Energy said on Wednesday that it had canceled its recent plans to buy oil to replenish the country's emergency crude stocks in light of the rise in prices. The strategic petroleum reserve has been depleted in recent years to make up for deficits caused by Russia's full-scale invasion of Ukraine.
The rise in crude oil prices has helped fuel gasoline prices higher ahead of the summer driving season that begins next month. The upward trend is a growing concern in the White House as the presidential election approaches in November. Washington recently warned Ukraine to call off strikes against Russian oil refineries over fears it could fuel rising oil prices.
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