Oil Prices Surge to $90 as US-Iran Tensions Escalate Stagflation Fears

Global markets are experiencing a significant shift as oil prices return to $90 per barrel due to escalating US-Iran tensions, which has led to a reevaluation of stagflation risks.

The recent attacks on Iranian targets have driven up international oil prices, exacerbating the global bond sell-off. Equities, gold, and crypto assets are also feeling the pressure, with concerns over stagflation and further rate hikes escalating.

Despite weakening economic data, including job openings, construction spending, and manufacturing PMI, energy supply shocks could re-elevate inflation. If price pressures persist, the Fed will face a difficult decision: whether to pivot towards easing based on employment and growth data or continue hiking while the economy weakens.

Rich Privorotsky, Head of Goldman Sachs' Delta One trading desk, believes the pressure facing markets stems not only from crude prices but also from refined product and natural gas markets. European natural gas prices have climbed to three-and-a-half-year highs, heating oil is approaching recent peaks, and US diesel crack spreads have hit record levels.

This has significant implications for inflation expectations, with rising oil and refined product prices potentially pushing headline inflation higher in the coming months. The key determinant of policy impact will be whether energy price increases ultimately spread to core inflation.