Brent crude jumped more than 3% to $108.09 a barrel and WTI rose 3% to $103.11 on Monday after Saudi Arabia shut its East-West pipeline following drone attacks, pushing Brent up almost 20% and WTI up 20% since the start of the month. JPMorgan strategists say equities can absorb the shock and are telling clients to buy into any oil-driven weakness ahead of third-quarter earnings.
Brent crude's November contract advanced over 3% to $108.09 a barrel on Monday, up almost 20% since the start of the month. West Texas Intermediate's October contract rose 3% to $103.11 a barrel, also up 20% over the same period.
Pipeline shutdown triggers the spike
Saudi Arabia closed its East-West pipeline, which had bypassed the Strait of Hormuz, after drone attacks on the facility that the kingdom blamed on militants in Iraq. The pipeline runs from oilfields in the country's east to the port of Yanbu on the Red Sea and serves as the main relief valve for oil supply given Iran's control of the Strait of Hormuz.
Iran-backed Houthi militias have also extended their control of the Bab al-Mandeb Strait, which connects the Red Sea with the Gulf of Aden.
JPMorgan says stocks can absorb the shock
Even with both benchmarks jumping over two weeks as Middle East tensions escalate, JPMorgan expects equities to weather the storm. Mislav Matejka, head of global and European equity strategy at the bank, said stocks should hold up even if the Federal Open Market Committee raises rates by a quarter-point on Wednesday, given strong earnings growth and anchored inflation.
Matejka advised using any market weakness from surging oil prices to add to portfolios ahead of likely stronger trading when companies report third-quarter results in October and November. In August, JPMorgan raised its year-end S&P 500 forecast from 7,800 to 8,000, after lifting its earnings-per-share target for the index 29% year-on-year to $350.
Traders eye the Trump-Xi meeting as an off-ramp
Patrick Munnelly, market strategist at Tickmill Group, said Trump's suggestion that the war in Iran could stretch beyond November's midterm elections, continued Houthi attacks on Saudi oil infrastructure, and an already tight Brent market from Hormuz disruptions have driven the risk premium significantly higher. According to MarketWatch, he said for many investors the September 24 meeting between Trump and Chinese President Xi Jinping "represents the last credible off-ramp".
But with neither side showing willingness to back down, Munnelly said traders increasingly believe Brent may need to retest its previous highs before price pressure becomes intense enough to force a political resolution.
Sources: MarketWatch, Financial Times
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