With oil prices nearing the $100 mark, are US stocks worried?

International oil prices are surging close to $100 per barrel, and the escalating tensions in the Middle East are directly transmitting the costs of this geopolitical conflict to the US financial markets. Rising inflation expectations, higher Treasury yields, and pressure on the consumer and industrial sectors —a clear chain of risk transmission is forming, posing a new test for the previously strong US stock market.

Brent crude oil touched above $99 on Tuesday, its highest level since July. Meanwhile, West Texas Intermediate (WTI) crude futures closed near $93, a new high since early June. The immediate trigger for the price increase was a new round of attacks by Houthi rebels on Saudi energy facilities and news of explosions on Kharg Island, Iran's main oil export hub. Goldman Sachs analysts noted in a report that "the market is increasingly pricing in a protracted Middle East conflict, and the risks to price forecasts are clearly skewed to the upside."

The impact of soaring oil prices has already been felt in the US stock market. The yield on the 10-year US Treasury note rose to 4.805% on Tuesday, its highest closing level since October 2023, further diminishing the attractiveness of equity assets. On Tuesday, the Dow Jones Industrial Average fell 1.2%; the S&P 500 closed down 0.6%; and the Nasdaq Composite fell 0.3%. The consumer discretionary and industrial sectors have been significantly impacted over the past month, while the energy sector has bucked the trend, with the S&P 500 energy sector up over 40% this year.

The situation in the Middle East continues to deteriorate, and supply concerns are rising again.

An article on Wall Street Insights states that the Houthi rebels recently launched a new round of attacks on Saudi energy infrastructure, claiming to have targeted the Jazan oil refinery with a daily capacity of 400,000 barrels and several domestic supply facilities. Saudi Arabia has confirmed that several energy facilities have been forced to cease operations due to the attacks.

Meanwhile, news of an explosion on Iran's Kharg Island further heightened market anxiety. The island is Iran's main oil export facility, and any potential disruption would have a significant impact on global supply, making the market highly sensitive to this.

According to Bloomberg, Russell Hardy, CEO of global commodities trader Vitol Group, said at an industry conference in Singapore that the refined fuels market is increasingly showing signs of supply shortages.

He estimates that current oil flow through the Strait of Hormuz is about 10 million barrels per day, about half of pre-war levels, with Middle Eastern exports losing about 2 million barrels per day and Russian exports losing about 2 million barrels per day due to the Ukrainian drone attacks.

Traffic in the Strait of Hormuz has remained sluggish for weeks. According to preliminary data from Kpler, only nine cargo ships passed through the waterway on Monday, and only five by the time of the report on Tuesday. In contrast, after the initial peace agreement between the US and Iran was signed at the end of June this year, the daily average number of ships passing through was close to 30, and the daily average in the 10 days before the outbreak of war was close to 100.

Multiple institutions have raised their oil price forecasts, indicating significant upside risks.

In response to the escalating geopolitical situation, several Wall Street institutions have successively raised their Brent crude oil price forecasts.

According to the Wall Street Journal, HSBC senior global oil and gas analyst Kim Fustier raised his benchmark forecast for Brent crude oil this year to $90 per barrel from $80 per barrel in a report on Tuesday, and revised his baseline scenario to: the US and Iran will reach some understanding, but the agreement will repeatedly face the risk of collapse.

She predicts that liquid flows through the Strait of Hormuz will gradually recover from the current 6 million barrels per day to 8 million barrels by the end of the year and 9.5 million barrels by the middle of next year, but will still be far below the pre-war level of about 20 million barrels per day. "This means the market will remain tight for longer than previously expected," Fustier said.

Chris Weston, Head of Research at Pepperstone Group, stated:

"Since the end of February, the situation has gone through too many ups and downs. Every time we thought things were about to improve, it was shattered. We're almost back to square one."

Goldman Sachs and Bank of America analysts also simultaneously raised their Brent forecasts. Bank of America analysts wrote in a report on Monday:

"If small-scale conflicts that continue to suppress oil flows persist until the end of the year, Brent crude may trade in the $95 to $120 per barrel range; however, if the conflicts escalate and cause significant damage to major energy infrastructure, oil prices could surge to $150 per barrel."

Goldman Sachs analysts, including Daan Struyven, stated in a report that the bank has slightly raised its oil price forecast based on the assumption that shipping disruptions will continue until 2027, and emphasized that "the risks to price forecasts are clearly skewed to the upside."

Rising inflation expectations are putting new pressure on US stocks, with Treasury yields becoming a new source of pressure.

The impact of rising oil prices on US stocks is not limited to the direct cost level; its transmission to the bond market through inflation expectations is becoming a broader market concern.

U.S. gasoline prices have risen significantly along with oil price rebounds, impacting consumer discretionary stocks over the past month, while industrial companies that rely heavily on oil input costs have also faced pressure. José Torres, senior economist at Interactive Brokers, stated:

"If geopolitical tensions cannot be de-escalated, progress on inflation will risk being reversed."

The yield on the 10-year U.S. Treasury note rose to 4.805% on Tuesday, its highest closing level since October 2023. Rising yields mean higher financing costs for businesses and also reduce the relative attractiveness of riskier assets such as stocks.

It's worth noting that Tuesday's sharp decline in U.S. stocks was not entirely driven by oil prices. The Dow Jones Industrial Average plunged more than 600 points, mainly dragged down by Amgen – the biotechnology company's stock price plummeted 10% in a single day, marking its biggest single-day drop in over 25 years, after a competitor's heart disease drug failed in a clinical trial, casting doubt on the prospects of similar investigational drugs.

Amid overall market pressure, the energy sector has emerged as one of the few beneficiaries. The S&P 500 energy sector has risen over 40% this year, with oil producers directly benefiting from rising oil prices. Marathon Petroleum shares closed at a record high of $397.77 on Tuesday.

Brent crude oil has risen more than 60% year-to-date, and the benchmark price for European diesel is approaching $200 per barrel. Global inventories continue to decline rapidly, and refined fuel prices are soaring across the globe.

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