The week opened with oil prices surging above $107 a barrel as tensions in the Middle East escalated, after an attack on a vessel in the Strait of Hormuz, an interruption to Saudi Arabia’s East-West pipeline, and Houthis apparently taking control of Perim, a key island in the Bab el-Mandeb Strait, on September 11.
Trump did try to calm markets, saying the Iran conflict would end soon and oil prices would fall, while calling on Ukraine to stop targeting Russian refineries. But reality hit back as Iranian proxies launched another wave of ballistic missiles and drone attacks on Saudi Arabia, sending oil prices even higher.
On top of that, a drone hit a gas station in Kyiv after Trump said Ukraine and Russia agreed to stop attacking each other’s energy infrastructure, while Ukrainian drones reportedly targeted the Syzran refinery in Russia’s Samara region.
So, after six months of conflict in the Middle East, instead of getting closer to peace, the Houthis have reportedly taken strategic islands in the Red Sea, Iran is making passage through the Strait of Hormuz harder, and Saudi Arabia’s East-West oil pipeline is offline.
As for where this could lead, back in March, economists warned that if the war with Iran continued and oil hit $150 a barrel, the world could face a global recession. The longer the conflict drags on, the worse it gets for the global economy — and not just because of oil prices, as the Middle East is also a major supplier of nitrogen fertilizers and helium, critical for semiconductor production.
No wonder the bloodbath in global markets continues, with U.S. Treasury yields pushing back toward 5% for the 10-year and the 2-year around 4.65%, well above the roughly 3.4% seen this spring. Europe is no better, and neither is Japan.
The hope now is that the situation could turn around quickly, and there may be a chance. On Tuesday, reports emerged that an Iranian government aircraft had landed in Riyadh. Trump could also come out with another TACO, but this time the market needs something more concrete than another promise that the conflict will be over “very soon.”
Now, if all of that fails and the situation continues to deteriorate, the pain in the bond market could spill over into stocks, drive up gold prices, and spread beyond.