Oil hits sixth-day high, Wall Street wobbles as Iran–Israel tensions escalate

Oil prices are rising sharply, and global markets are edging into risk-off mode as the Iran–Israel conflict shows no signs of slowing, entering its sixth day on Wednesday.

The geopolitical crisis, centred near the Strait of Hormuz, is reviving fears of a global energy shock, even as central banks weigh the fallout on inflation and growth.

Brent crude futures rose 19 cents to $76.64 a barrel in early trading, while US West Texas Intermediate climbed 23 cents to $75.07. That followed a 4 per cent spike in prices on Tuesday amid mounting concerns that the Middle East conflict could disrupt oil supplies.

Strait of Hormuz back in focus

Much of the market anxiety revolves around the Strait of Hormuz, the narrow chokepoint through which nearly 20 per cent of the world’s seaborne oil passes. According to Reuters, two tankers collided and caught fire near the strait on Tuesday, raising red flags about safety in the region.

The United Kingdom Maritime Trade Operations also warned of “electronic interference” affecting ship navigation systems in the area, a possible sign of growing cyber-warfare threats tied to the conflict.

Iran, the third-largest producer in OPEC, pumps around 3.3 million barrels per day. Should the fighting escalate, or sanctions intensify, traders expect disruptions to Iranian output though other OPEC members may struggle to compensate using spare capacity.

Trump ups the ante

On Tuesday, US President Donald Trump called for Iran’s “unconditional surrender” and sent additional fighter jets to the region, according to US officials quoted by Reuters. The US military buildup comes as part of an effort to deter further escalation, though markets fear it may have the opposite effect.

Trump’s early departure from the Group of Seven summit in Canada only deepened investor unease. While there were hopes of progress on global trade talks, those evaporated as Trump returned to Washington citing Iran’s provocations.

“The market was anxious to hopefully hear updates on trade agreements out of the G7 and the news of Trump leaving early was disappointing,” Eric Sterner of Apollon Wealth Management told Reuters.

Wall Street wobbles

The risk-off sentiment dragged down US stocks on Tuesday. The Dow Jones Industrial Average dropped 0.70 per cent, the S&P 500 slipped 0.84 per cent, and the tech-heavy Nasdaq fell 0.91 per cent.

Meanwhile, oil continued its upward climb, with Brent settling 4.52 per cent higher at $76.54 per barrel and US crude jumping 4.46 per cent to close at $74.97.

The conflict is also fuelling demand for safe-haven assets. Yields on 10-year US Treasuries fell to 4.389 per cent, down 6.5 basis points from Monday, a sign of growing investor caution.

The VIX volatility index, often called Wall Street’s “fear gauge,” rose to a four-week high of 21.6, though still far below pandemic or financial crisis peaks. Analysts said the current spike reflects concern but not full-scale panic yet.

“This is like Stage 1 of moving towards a little bit of volatility,” said Matt Thompson of Little Harbor Advisors. “The VIX marketplace thinks the conflict is going to be contained.”

Will the Fed change course?

All eyes now turn to the US Federal Reserve, which is expected to keep its benchmark rate steady at 4.25–4.50 per cent when it concludes its policy meeting on Wednesday.

However, market analysts including IG’s Tony Sycamore suggest the Iran–Israel war could prompt the Fed to consider an earlier-than-expected rate cut. “The situation in the Middle East could become a catalyst for the Fed to sound more dovish, as it did follow the October 7, 2023, Hamas attack,” Sycamore told Reuters.

Lower rates generally boost oil demand by stimulating growth. But higher energy costs can also stoke inflation, complicating the Fed’s policy response.

“Jerome Powell is going to continue to express that they are focused on data at this point,” said Matt Rubin of Cary Street Partners. “And that data does not warrant a cut.”

Broader global impact

The ripple effect is being felt across Europe too, where the STOXX 600 index closed at a three-week low on Tuesday. Investors are also bracing for interest rate decisions from the Bank of England and the Swiss National Bank later this week.

In Asia, the Bank of Japan held rates steady at 0.5 per cent, its highest level since 2007, reflecting the growing uncertainty amid global inflation risks and weak domestic demand.

Despite the conflict, Qatar said operations at the world’s largest gas field remain unaffected, even as Iran suspended some output after Israeli air strikes.

The Iran–Israel war is redrawing the global economic map, with oil markets, central banks, and investors caught in its crosshairs.

The longer it lasts, the deeper its impact on inflation, policy, and global growth.

(With inputs from the agencies)