Oil prices extended gains Monday as Israel and Iran pounded each other with missiles for a fourth day and threatened further attacks, stoking fears of a lengthy conflict that could reignite inflation.
Gold prices also rose back towards a record high thanks to a rush into safe havens, but while most equity markets dropped further into the red the losses were limited on hopes that the conflict does not spread through the Middle East.
The dollar held its ground in choppy trading on Monday, as investors keenly monitored Israel-Iran fighting for any signs that it could escalate into a broader regional conflict and braced for a week packed with central bank meetings.
As both Iran and Israel showed no signs of backing off from their attacks, market participants mulled the prospect that Tehran might seek to choke off the Strait of Hormuz, the world’s most important gateway for oil shipping, which could raise broader economic risks from disruptions in the energy-rich Middle East.
Crude prices were up about one percent after closing seven percent higher on Friday following Israel’s preemptive strike on Iran.
On Monday, the dollar was flat at 144.08 Japanese yen after rising nearly 0.4 percent earlier in the session, while the euro was muted at $1.1555.
Investors were also gearing up for key central bank meetings this week, with a particular eye on the US Federal Reserve and Bank of Japan, as well as talks with Washington aimed at avoiding Donald Trump’s sky-high tariffs.
Israel’s surprise strike against Iranian military and nuclear sites on Friday, killing top commanders and scientists, sent crude prices soaring as much as 13 percent at one point on fears about supplies from the region.
Analysts also warned that the spike could send inflation surging globally again, dealing a blow to long-running efforts by governments and central banks to get it under control and fanning concerns about the impact on already fragile economies.
“The knock-on impact of higher energy prices is that they will slow growth and cause headline inflation to rise,” said Tony Sycamore, a market analyst at IG.
“While central banks would prefer to overlook a temporary spike in energy prices, if they remain elevated for a long period, it may feed through into higher core inflation as businesses pass on higher transport and production costs.
“This would hamper central banks’ ability to cut interest rates to cushion the anticipated growth slowdown from President Trump’s tariffs, which adds another variable for the Fed to consider when it meets to discuss interest rates this week.”
Both main oil contracts were up more than one percent in early Asian trade.
But Morningstar director of equity research Allen Good said: “Oil markets remain amply supplied with OPEC set on increasing production and demand soft. US production growth has been slowing, but could rebound in the face of sustained higher prices.
“Meanwhile, a larger war is unlikely. The Trump administration has already stated it remains committed to talks with Iran.
“Ultimately, fundamentals will dictate price, and they do not suggest much higher prices are necessary. Although the global risk premium could rise, keeping prices moderately higher than where they’ve been much of the year.”
Gold, a go-to asset in times of uncertainty and volatility, rose to around $3,450 an ounce and close to its all-time high of $3,500.
Also in focus is the Group of Seven summit in the Canadian Rockies, which kicked off on Sunday, where the Middle East crisis will be discussed along with trade in light of Trump’s tariff blitz.
Investors are also awaiting bank policy meetings, with the Fed and BoJ the standouts. (Arab weekly)