On Friday, after failed U.S. negotiations on Iran’s nuclear program, Israel launched surprise attacks on Iran as Iran launched counterstrikes against Israel. While the human toll is, of course, everyone’s paramount concern, it is FEG’s professional responsibility to assess and monitor the financial impact.
As with most Middle East crises, energy prices are the first to react. Oil prices rose on the news, and WTI closed Friday up 7.2% at $73/barrel. This was the largest one-day gain since last October. However, context is important. Despite the recent volatility, oil prices are only back to where they were in February. Natural gas prices also rose, closing Friday at $3.60/mcf, up 3.1%, but garnered few headlines. The broader equity markets closed the week down on Friday, with the S&P 500 declining 1.1% and the NASDAQ falling 1.3% as news spread. The yield on the 10-year Treasury finished at 4.4%, mostly flat.
Iran produces approximately 4 million barrels of oil daily (about 4% of global production),1 and exports 1.5 million barrels daily. China is the biggest buyer of Iranian oil. The largest concern is the potential disruption to the Strait of Hormuz, which nearly 20% of global oil flows through. A prolonged blockade could potentially push oil prices above $100/barrel. However, spare capacity from OPEC+ members like Saudi Arabia and the UAE, coupled with potential increases in U.S. shale output, could ease the impact of any short-term supply shocks.
One knock-on effect from higher energy prices could be higher inflation expectations. That may be one reason the U.S. Treasury market did not sell off as expected. Typically, demand for Treasuries tends to increase in times of crisis. In this case, the 10-Year closed at 4.40%. To the extent the consensus views continued conflict as inflationary, this could push near-term Fed rate cuts further off the table unless a broader sell-off forces the Fed’s hands.
As the conflict escalated, credit spreads did not move much, indicating the credit markets view the risk as more closely tied to the energy markets (for now). Energy does comprise ~15% of the broad high yield market, however, and CCC-rated high yield did rally 10 bps on Friday. Energy-related names are generally a small sub-component of the Barclays Aggregate Index in the industrials and utilities sectors. Still, these names are less exposed to short-term energy price fluctuations (infrastructure, for example).
On the public equity side, energy is less than 4% of the S&P 500, so the direct impact has been minimal – a silver lining from large cap tech names dominating the index and continuing to drive performance. Sectors specifically negatively impacted included travel and leisure, and airlines. Outperformers were fewer but included defense and energy companies.
At times like this it is important for investors to remember that markets are resilient and forward-looking. They recovered from the initial sell-off when the Russia-Ukraine conflict began, and more recently, fully recovered from near Bear Market territory during the initial tariff concerns. At the time of this writing, markets were already recovering from Friday’s losses. Having said that, we are about three weeks from the tariff pause, and this conflict adds further to global uncertainty. We believe it is likely 2025 will remain a volatile year. FEG will continue to monitor the evolving situation and keep clients well-informed on potential portfolio impacts.
1 https://www.eia.gov/international/content/analysis/countries_long/Iran/pdf/Iran%20CAB%202024.pdf
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