Oil spikes up stocks tumble down where have we seen that before?

Only one thing matters when it comes to stock markets and geopolitics: what is the impact on the oil price? As we see, when it came to the start of the Russia-Ukraine conflict, and now to the Middle East, the impact on both can be dramatic. Oil traded above $110 dollars a barrel overnight. Asian markets were hit hard, and the rest of the world is looking anything between 1-2% lower as markets open shortly this morning. Iran has put a new leader in place, Khamenei’s son, who vows to continue the fight. I suppose the question now is whether ordinary Iranians will come out and rise up against the appointment of the younger Khamenei as president Trump will undoubtedly hope.   

Trump has become known as TACO man. When stocks get hit, he tends to back down. That was slightly easier to do when it came to tariffs.  On this occasion, it may be harder. He claims $100 oil is a price worth paying; he also has the midterm elections to prepare for.

Oil prices are not the only commodity being impacted. The Iran situation is stalling access to the country’s low-cost urea and ammonia facilities, which are vital for agricultural fertilisers and account for about 5% and 11% of global fertiliser trade, respectively. No one needs reminding of the other consequence when Russia started its war against Ukraine, commodity prices rose, and fears of stagflation were bandied about by all market commentators. Scarcity of crop fertilisers leads to higher food prices. Food prices, in particular, became a big issue in the last presidential election, and have appeared to be coming under control; this will be another unwanted consequence for the president.

The good news, if there is any, is that the fundamentals for the oil price are for it to be much lower than it has spiked to in the past week. So, should signs of a cessation of hostilities appear, the oil price would come back quite quickly, and goods would once again start to flow through the straits of Hormuz.

On the more negative side, whether the Russia-Ukraine war is a good proxy for what could happen now to stock markets is debatable, but between Feb 2022, when the Russia-Ukraine conflict started, and the market’s low point, the S&P 500 fell approximately 20%. So far, we have had around 5%. So what do we learn? Buying the dip is generally profitable, but rushing in on the first wave of the selloff is risky; ultimately, stocks recover.