American investors are ready to shrug off the Iran war. The march toward $100-a-barrel oil is making that difficult.
Brent crude, the international oil benchmark, is now up around 35% from this summer's lows. It jumped above $99 a barrel Tuesday, the highest since July, before giving up some gains.
Oil's rebound toward the year's highs is already showing up in domestic gasoline prices. That has hit consumer discretionary stocks sharply over the past month, as well as industrial companies which count oil as a key input cost.
The expected impact on inflation has also sent Treasury yields higher, another challenge for stocks. The 10-year Treasury yield rose to 4.805% Tuesday, its highest closing level since October 2023.
Yields, which rise when bond prices fall, affect borrowing costs for companies and can make riskier assets such as stocks look less attractive when they are elevated.
"Progress on inflation is poised to reverse if geopolitical tensions don't simmer," said José Torres, senior economist at Interactive Brokers.
Oil-sensitive stocks took a hit Tuesday before recovering some ground as Brent fell off the day's highs to close at $97.92 a barrel.
The Dow Jones Industrial Average shed 1.2%, or about 628 points, dragged down by Amgen. The biotechnology company tumbled 10%, its biggest one-day decline in more than 25 years, after a competitor's heart disease drug failed a clinical trial, casting doubt on similar drugs under development.
The S&P 500 index closed 0.6% lower. The Nasdaq composite fell 0.3%.
The U.S. attacked Iranian oil tankers on Tuesday, after Iran launched an attack against U.S. Navy ships on Monday, according to a U.S. official.
Iran's recent attempts to hit American naval assets are raising alarm that its military is using more sophisticated weapons and could be getting assistance from China or Russia, according to the officials.
Kim Fustier, senior global oil and gas analyst at HSBC, said in a Tuesday note that her new base case now assumes that a U.S.-Iran understanding will emerge but be vulnerable to repeated breakdowns.
Traffic through water chokepoints will only improve gradually as the industry adapts to elevated risk, she said, adding that liquids flows through the Strait of Hormuz would rise from the current six million barrels a day to eight million barrels a day by year-end and 9.5 million barrels a day by mid next year. Before the war, around 20 million barrels a day flew through the waterway.
"This leaves the market tighter for longer than we had previously assumed," Fustier said. She raised her forecast for Brent to $90 a barrel for this year from $80 a barrel previously.
Analysts at Goldman Sachs and Bank of America also raised their Brent forecasts.
"If skirmishes curbing oil flows continue into year end, Brent could trade in a $95-120 a barrel range. Meanwhile, a broader conflict resulting in major energy infrastructure damage may spike prices as high as $150 a barrel," Bank of America analysts wrote.
Traffic through the Strait of Hormuz has been subdued for weeks. On Monday, only nine commodities vessels crossed the waterway and five so far Tuesday, according to preliminary data from Kpler. By comparison, transits averaged around 30 in late June after the U.S. and Iran signed a preliminary peace deal and nearly 100 in the 10 days before the war.
The S&P 500 energy sector is now up more than 40% on the year, with oil producers benefiting from higher prices. Shares of Marathon Petroleum closed at an all-time high $397.77 on Tuesday.
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