Oil surges past $116 as Middle East supply crisis roils markets

Oil prices have climbed past $116 a barrel, marking their sharpest single-day surge in years and sending shockwaves through financial markets across the Asia-Pacific region. On Monday, benchmark crude futures jumped 26 percent to $116.50—their highest point since 2022—while US West Texas Intermediate crude climbed 28 percent to $117.03. The spike wiped roughly $90 billion from the Australian share market in what became its worst trading day since tariff announcements last April, with the S&P/ASX 200 falling 2.9 percent to 8,599 points, though at one point the index had dropped as much as 4.3 percent.

The price surge reflects genuine supply concerns emanating from the Middle East. Over the weekend, reports emerged that major oil producers were beginning to throttle output as storage tanks filled to capacity. The United Arab Emirates and Kuwait have both cut production, joining Iraq, whose output has fallen roughly 60 percent. These reductions anticipate a prolonged closure of the Strait of Hormuz, a critical chokepoint through which roughly half the world's traded oil passes. Diesel futures—a barometer for global supply stress—jumped another 16 percent on Monday alone, bringing their monthly gain to 92 percent. The price of oil has now climbed around 40 percent since Friday morning, when it traded at $82 a barrel.

The escalating energy costs are already reshaping Australia's political conversation. Dan Tehan, the Shadow Minister for Energy and Emissions, warned that wholesalers have begun rationing petrol and diesel supplies across the country, invoking the specter of World War II-era fuel rationing. His concern cuts to a real vulnerability: Australia's economy runs on diesel. Trucks carrying food, pharmaceuticals, and other essentials depend on steady fuel supplies. Petrol prices at the pump have already climbed above $2 a litre, and further increases appear inevitable if global supply remains constrained.

The market turmoil spread unevenly across sectors. Banks, technology, healthcare, and mining stocks all sold off sharply. Commonwealth Bank dropped 1.8 percent, while mining heavyweight BHP fell 5.1 percent to extend its two-day losses to 10 percent. Mineral Resources, a lithium and iron ore producer, lost 1.6 percent. Airlines bore the brunt of the panic. Qantas tumbled 4.5 percent and has now shed nearly 15 percent since the conflict began. Virgin Australia, which listed on the market in June 2025 at $2.90, fell 5.5 percent to $2.74—its lowest level since going public. The Middle East supplies roughly half the world's aviation fuel, and benchmark prices for jet fuel have climbed 80 percent over the past month. The only bright spot came in the energy sector itself, where oil and gas producers Woodside and Santos each gained around 2 percent.

Bond markets are now pricing in a different kind of risk: inflation. Australian government bond yields rose sharply as traders began factoring in higher inflation from soaring energy costs. The yield on one-year debt climbed 11 basis points to 4.41 percent, five-year debt jumped 15 basis points to 4.64 percent, and ten-year yields rose 13 basis points to 4.97 percent. Australia's ten-year borrowing cost is now higher than those of the UK, US, Canada, France, and Japan. Stephen Miller, a strategist at GFSM Funds Management, attributed the rise to weak productivity growth and expectations that inflation may persist longer than previously anticipated. Interest rate futures traders are now positioning for roughly 63 basis points in additional cash rate increases from the Reserve Bank, potentially pushing the peak rate to just under 4.5 percent. Coal prices also climbed 1.8 percent to $135.25 a tonne, near their highest level in 15 months, as an Iranian drone strike last week shut down Qatar's main liquefied natural gas export hub for the first time in three decades.

President Donald Trump sought to calm markets on Monday, posting on his Truth Social platform that oil prices would fall rapidly once the Iran nuclear threat was eliminated, calling concerns about the spike a small price to pay for global safety and peace. Yet analysts remain skeptical. David Bassanese, chief economist at Betashares, warned that the longer the conflict persists, the greater the upside risk to oil prices—and the greater the pressure on Trump to broker a deal. Unable to export product and facing full storage tanks, Middle Eastern producers are cutting output further. Drone and missile attacks on refineries compound the supply squeeze. The Australian dollar fell below 70 US cents on Monday, closing at 69.9 cents, as risk-averse investors moved capital to safer havens. Across the Asia-Pacific, the selling accelerated: Japan's Nikkei 225 plunged 6.3 percent in early trade, South Korea's Kospi 200 dropped 7.3 percent, and US futures pointed to significant losses when Wall Street opened, with the S&P 500 expected to fall 1.8 percent and the Nasdaq projected to lose 2.1 percent.