The price of oil has pushed through $US116 a barrel yesterday, at one point wiping $130 billion from the local sharemarket, as fears of a global economic meltdown hit investors. The S&P/ASX 200 closed down nearly three per cent to 8599 points, having recovered somewhat in the afternoon session. At its low, the ASX200 was off 4.3 per cent – the steepest sell-off since the COVID-19 pandemic in 2020. It is down seven per cent since the beginning of last week. The tumble came as oil prices surged towards $US120 a barrel, including a massive 24 per cent rise yesterday. Brent is now trading at almost double its level at the beginning of this year. The immediate reason for the jump is the attacks on, and closures of, oil refineries in the Middle East, and restrictions on the Strait of Hormuz, which carries about 20 per cent of the world’s oil.

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News in brief

Iran has appointed Mojtaba Khamenei, son of the late Ali Khamenei as the new Supreme Leader. US President Donald Trump has previously said he wanted a say in who leads Iran, and Khamenei’s son is unacceptable to him.

Stockpiles of iron ore in China have hit record levels, up 25 per cent since August, putting pressure on Australia’s big miners and the federal budget bottom line.

Commonwealth Bank has referred two mortgage brokers and a string of accountants to police over what could be a billion-dollar loan fraud.

Australia’s strict social media laws are capturing not only children, but adults well, with one global adult site blocking users in Australia because of new age verification rules.

Only 54 per cent of Americans consumed alcohol last year, the lowest figures since Gallup surveys began in 1932, as rising health consciousness, weight loss drugs, the rise of non-alcoholic drinks, and tightening budgets conspire to reduce the number of people imbibing. It's particularly apparent in Gen Z.

Fear-o-meter

Where to next for the share market? It is a surprise that it has taken so long for the ASX200 to be sold off. Eight days ago, after the initial bombing in Iran, the market was at a record high.

Yesterday’s selling reflected a near 25 per cent jump in oil prices. If the Strait of Hormuz stays closed, 20 per cent of the world’s oil will be withdrawn from the global economy, and that will push up energy costs, including petrol.

Inflation will surge, though it isn’t clear whether the Reserve Bank will look through that as a temporary phenomenon, or whether it will trigger further rate hikes. It will also cause a slowdown in growth, and stagflation – low growth and high inflation – will become a reality.

Equity markets are likely to have a rocky road ahead unless there is some breakthrough in the Middle East, and the conflict subsides. The appointment of Mojtaba Khamenei, son of the late Ali Khamenei, suggest the Iranians aren’t looking for peace.

Much depends on how Donald Trump reacts. Even though he has a history of backing down, that’s unlikely when it involves the invasion of another country. It is going to be quite a ride for investors.

Fear & Greed Q+A today

On yesterday's tumble on the ASX, and how to think about the sharp jump in oil prices:

 

“Twenty-five percent in one day is quite a big move. But mind you we have seen similar episodes before in response to events in the Middle East.

 

If you go back to the 1970s — the first oil shock globally saw a four-fold rise in world oil prices from $3 a barrel to $12 a barrel. The second oil shock in 1979… saw a three-fold increase from around $12 to $38 a barrel.

 

We saw a doubling in oil prices when Iraq invaded Kuwait in 1990… and we saw another spike around the Ukraine war in 2022 with worries about Russian oil supply.

 

So we have seen these sorts of things before — but 25% in one day is quite a big move… and it does seem to reflect signs that the war may go on longer than people had hoped.”

Greed-o-meter

Fuel prices have risen sharply across the country - here's the average price for unleaded petrol in each capital city.

Source: fuelprice.io

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