NEW YORK (AP) — Brent crude oil prices surged to their highest level since May, driven by intensified conflict in the Middle East on Thursday, which threatened to disrupt the global crude supply. Concurrently, significant declines in the stock values of two key Wall Street firms, Alphabet and Tesla, led to the U.S. stock market experiencing its most severe loss in a month.
The S&P 500 dropped by 1.2%, heading toward its first consecutive weekly decline since March. The Dow Jones Industrial Average fell by 506 points, or 1%, and the Nasdaq composite decreased by 2.2%.
Stocks were pressured by the rising oil prices, which increase business costs and reduce consumer spending power. Brent crude oil, the global benchmark, soared 7% to close at $100.69 per barrel.
During the trading day, Brent touched $102, marking the highest level since May for the most traded Brent contract. The spike was prompted by assaults on two Saudi oil tankers in the Red Sea, threatening another crucial route for transporting oil from the Middle East, in addition to the Strait of Hormuz.
Highlighting the significance of this maritime passage for the economy, President Donald Trump warned of “major military punishment” against the Houthi rebels in Yemen, supported by Iran, if they continue attacking vessels.
A few weeks ago, Brent had fallen below $72 per barrel, returning to levels seen before the United States and Israel’s military engagement with Iran, amidst hopes of easing tensions and reopening the Strait of Hormuz.
The surge in oil prices is likely to exacerbate inflation, which had been slowing more than expected. This could compel the Federal Reserve and other central banks to increase interest rates, which could decelerate economies and reduce stock values.
The European Central Bank maintained its main interest rates in its meeting on Thursday. However, traders are currently estimating a 36% probability that the Fed will raise the federal funds rate at its upcoming meeting, up from a 12% probability the previous week, according to CME Group data.
If the Fed does increase rates, it would be the first hike since 2023.
Rising oil prices have also driven the 10-year Treasury yield up to 4.69% from 4.67% the previous day, and from 3.97% before the conflict with Iran. This increase has already pushed long-term U.S. mortgage rates to their highest point in nearly a year.
As oil prices rise, gasoline prices tend to follow. Currently, a gallon of regular gas costs an average of $4.09 in the U.S., according to AAA, which is below the May high of approximately $4.56, but up from $3.93 a month ago.
On Wall Street, companies with substantial fuel expenses suffered sharp losses due to concerns about rising costs.
American Airlines’ stock dropped 8.4% even though it posted a significantly larger profit in the spring than analysts had predicted, typically a positive signal for stock prices. The airline increased ticket prices to counteract higher fuel costs in the last quarter.
Southwest Airlines’ stock also fell by 6.2%, despite reporting better-than-expected profit and revenue.
Tesla was a major drag on the U.S. stock market, plunging 14.5% after the company, led by Elon Musk, reported profits that fell short of analysts’ expectations for the latest quarter. As one of the largest stocks in the S&P 500, Tesla’s performance has a significant impact on the index.
Alphabet, another major stock, saw its shares decline by 7.1% despite reporting higher-than-expected profits and revenue.
Investors were more concerned about Alphabet’s plans to expand spending on artificial intelligence. The company increased its capital expenditure forecast for the year after nearly doubling its investments to about $45 billion from the previous year.
CEO Sundar Pichai indicated that AI contributed to an 82% boost in cloud revenue growth last quarter, yet there remains uncertainty about whether the investments in AI will yield productivity and financial returns.
These concerns have been creating volatility in the AI sector recently, impacting the broader stock market.
Overall, the S&P 500 dropped by 90.66 points to 7,408.30. The Dow Jones Industrial Average fell by 506.93 to 51,711.65, and the Nasdaq composite declined by 553.21 to 25,137.69.
In international markets, European indexes fell sharply following the oil price surge, with France’s CAC 40 dropping 1.6%, among the larger declines.
Earlier in the day, Asian markets showed strength, with South Korea’s Kospi rising 4.4%.
AP Business Writers Matt Ott and Elaine Kurtenbach contributed to this report.
