Wall Street Shaken by Oil Shock: Gulf War Reshapes Risk Pricing in US Markets

New York | EcoPulse24

US stock markets entered an extraordinary week of intense volatility as war escalated in the Middle East and oil prices climbed to their highest levels in months. The renewed energy shock revived long-standing market fears: higher inflation and the postponement of US interest rate cuts.

Since US-Israeli military strikes on Iran at the end of February, Wall Street has swung between sudden sell-offs and partial recoveries, with investors closely watching developments in oil and the Strait of Hormuz - a route for about a fifth of global oil trade.

Markets opened the week with sharp losses after news of military strikes during the weekend. The Dow Jones fell over 500 points in early trading, while the S&P 500 and Nasdaq also declined as investors shifted quickly to defensive assets.

However, selective buying in major technology and AI-related stocks helped pare losses, maintaining their investment appeal even amid geopolitical turmoil.

On Tuesday, markets recognized the crisis might not be short-lived. Oil prices surged and real concerns about supply disruptions emerged. The Dow lost more than 1,200 points in early trading before recovering some ground, while the S&P 500 and Nasdaq also fell as cyclical sectors bore the brunt of selling.

Industries most affected were those directly tied to the real economy and global supply chains. Airlines and tourism were hit hard by rising fuel costs, and heavy industry and financial stocks also declined.

Conversely, defense and energy companies benefited from the geopolitical developments, with defense stocks rising on expectations of increased military spending and oil and gas shares posting strong gains.

Wednesday brought a brief respite as better-than-expected US jobs data aided a partial recovery. Still, this was insufficient to shift the overall market sentiment.

Thursday proved the most impactful day of the week. Reports of an oil tanker being targeted in the Gulf sent oil prices sharply higher: West Texas Intermediate exceeded $81 a barrel and Brent rose above $85. Inflation fears returned forcefully, triggering another wave of selling in US equities.

The Dow Jones erased its gains for the year, while airline, industrial, and investment bank stocks faced renewed pressure. Energy companies were the clear winners, with oil exploration and production shares hitting annual highs.

Oil is currently the key factor driving markets. WTI crude rose to nearly $81 a barrel, the largest weekly increase since the Ukraine war began in 2022. Brent climbed to about $85, amid mounting concerns over the safety of shipping through the Strait of Hormuz, which handles around 20 million barrels of oil and petroleum products daily - a vital global energy artery. Prolonged disruptions could trigger a major supply shock and sharp price increases.

These developments directly impacted expectations for US monetary policy. Before the crisis escalated, markets were betting on a possible Fed rate cut by mid-2026. The recent oil spike reignited inflation concerns, leading investors to reassess those expectations. Interest rate futures now indicate a much lower probability of near-term cuts, with growing belief that the Fed may keep policy tight for longer.

With the February US jobs report approaching, investors are watching labor market data for further signs of economic slowdown amid higher energy prices and geopolitical tensions.

EcoPulse24 Analysis:

What Wall Street experienced this week is more a repricing of global risks than a market collapse. Investors are clearly distinguishing between digital economy sectors - less sensitive to geopolitical shocks - and industrial and transport sectors, which are directly affected by rising energy costs. The key factor in the coming weeks will be the trajectory of oil prices. If crude remains above $80 per barrel, inflation could return to the forefront of the US economy, potentially delaying rate cuts and putting elevated stock valuations under greater pressure than seen in recent days.