Oil prices shot up, Wall Street’s “fear index” soared and global stock markets bounced around Monday, as war spread across the Middle East after the joint U.S.-Israeli attack on Iran.
Oil prices rose, with Brent crude increasing as much as 13 per cent to reach $82 (U.S.) per barrel, but it was back down to $76.71 by 4 p.m. West Texas Intermediate futures rose as high as $73, a gain of around 8 per cent, before settling back down to $71.46.
The Chicago Board Options Exchange’s volatility index, usually known by its ticker symbol VIX, also rose to 21.41 points, a rise of 7.8 per cent.
The VIX — sometimes referred to as Wall Street’s fear index — is based on futures trading, and is a gauge of expected volatility in the broad-based S&P 500 composite index. The higher it goes, the greater the expected volatility.
Iran is one of the world’s largest oil producers, and has historically controlled the Strait of Hormuz, a key oil shipping lane in the Middle East.
Since Saturday’s joint U.S.-Israeli airstrikes that killed senior leadership including Supreme Leader Ayatollah Ali Khamenei, Iran has launched retaliatory attacks against several other countries in the region that host U.S. military forces, including oil-producing giant Saudi Arabia.
Veteran energy economist James L. Williams said there’s a simple reason oil prices are rising.
“It’s not just that nothing’s getting out today. It’s that … this is going to be a long, extended battle,” said Williams, president of WTRG Economics. “It’s going to be extended, but we don’t know how long.”
A significant portion of the world’s crude oil typically flows through the Strait of Hormuz, said Williams, and now that’s essentially ground to a halt.
“Anywhere from 20 to 25 per cent of the world’s supply of crude runs through there,” Williams estimated. “Now, the only thing that’s going is maybe a little bit of Iranian crude going to China.”
The threat of missile or drone strikes from Iran or Iranian-backed militias in the region has made oil producers leery of shipping now. And perhaps just as crucially, Williams said, it’s made insurance on those shiploads of oil either impossible to get or prohibitively expensive.
Since the initial U.S.-Israeli strike, the price of crude oil has risen by as much as $8 (U.S.) per barrel. For each $1 (U.S.) rise in the price of crude, there’s roughly a one cent (Canadian) rise in the price of gasoline at the pumps, Williams estimated — even in Toronto, more than 10,000 kilometres from the Strait of Hormuz.
“Even though North America’s a little isolated physically from the impact of this, crude is a world price. We’re going to see the impact on prices here, too,” said Williams.
And that bump in oil and gasoline prices could eventually spill over into inflation in the broader Canadian economy, warned Pedro Antunes, chief economist at Signal 49 Research, formerly known as the Conference Board of Canada.
Canada exports roughly $260 million per year of agricultural products — especially soy beans — to Iran, with less than $40 million coming in the other direction to Canada, mostly in the form of “other nuts.”
“The trade we have between the two countries is really quite small, so that’s not the biggest impact here,” said Antunes.
Oil, however? That’s a different story.
“This is an oil price shock. And for Canada an oil price shock is positive for energy producers but a negative for the rest of the country,” said Antunes. “Everything that we do requires energy, including for transportation. And a lot of what we consume requires plastics, which require oil to produce.”
The scale of the shock — and how long it lasts — depends on how much longer the war continues, Antunes said. And that’s something that is almost impossible to know with any degree of certainty.
“It will depend on how long this thing lasts, and right now, we just don’t know,” Antunes said.
Early Monday, U.S. President Donald Trump said he expects the war to continue for at least four to five weeks, but that he’s prepared “to go far longer.”
In Toronto, the benchmark TSX Composite Index dropped almost two thirds of a percentage point in the first three minutes of trading, wiping out more than $30 billion in value before bouncing back, and closed the trading day up by more than half a percentage point. In New York, the Dow Jones industrial average was off by almost half a percentage point by 11 a.m., a loss of more than $100 billion (U.S.) in market value, but by the close of trading was up by 0.15 per cent. London’s FTSE 100 was down by more than a full percentage point, wiping out more than $40 billion.
