The "three-digit crisis" in oil prices is quietly approaching. Is the market underestimating the energy shock?

Oil prices hit triple digits, sparking a global sell-off in stocks and bonds, with the Federal Reserve caught in a dilemma.

The ongoing US-Iran conflict continues to escalate, driving oil prices higher, weakening employment data, and reigniting inflation pressures. These triple pressures are hitting investors hard, turning concerns about “stagflation” in the US from theoretical speculation into a real threat.

On Monday, Brent crude oil prices broke above $100 per barrel, reaching the highest level since the Russia-Ukraine war began. Meanwhile, US retail gasoline prices have surged past $3 per gallon and are still climbing. Trump posted on social media that rising oil prices are a “small price” to pay for winning the war, but whether this resonates with voters remains uncertain.

Global markets are highly volatile. Asian stocks continued to decline, with the Nikkei dropping over 5% in a single day, and South Korea’s KOSPI falling nearly 6%. Over the past week, they had already declined 5.5% and over 10%, respectively. Bond markets are also under pressure, with the UK two-year government bond yield expected to see its largest daily increase since 2022.

Oil prices reach triple digits: energy crisis intensifies

The energy crisis triggered by the Iran conflict is accelerating. Oil prices broke through $100 per barrel on Monday, marking the first time since the Russia-Ukraine war in 2022 that this psychological threshold has been crossed.

Structural supply-side pressures are a key driver. Gulf oil producers continue to cut output, combined with Iran’s ongoing threats to the Strait of Hormuz, a critical global oil shipping route, fueling fears of supply disruptions. Geopolitically, hardline figures in Iran, including the son of Supreme Leader Khamenei, Mojtaba Khamenei, have been appointed as the new Supreme Leader, further narrowing the space for de-escalation.

As oil prices soar, market focus shifts to potential intervention measures. According to Reuters, G7 finance ministers are considering a joint release of emergency oil reserves. US Senate Democratic leader Schumer has called on Trump to tap the Strategic Petroleum Reserve, but Trump has not yet responded. Analysts note that even if reserves are released, the effectiveness and duration of relief remain uncertain amid the ongoing crisis.

Stagflation risk: central banks face worst-case scenario

This round of oil price increases comes at a particularly tricky time—coinciding with disappointing US employment data. Last Friday’s February non-farm payroll report was unexpectedly weak. While some analysts attribute this to bad weather disruptions, the overall report lacked positive signals, indicating a stagnating labor market.

The combination of these data points sharply raises the risk of stagflation. Economic growth is slowing or even contracting, while inflation pressures continue to rise. This creates a policy dilemma central banks dread: raising interest rates could further suppress a fragile economy, while cutting rates might fuel runaway inflation.

Reuters analysts suggest that the most likely response from the Fed and other major central banks is to hold steady and wait. However, this choice is unsatisfying for both sides: those hoping rate cuts will boost the economy will see the policy window narrow, while inflation-wary investors will struggle to find confidence in the central bank’s silence.

Market risk aversion: dollar strengthens, gold loses shine

Amid multiple uncertainties, investors’ safe-haven logic is quietly shifting. The dollar remains strong, continuing last week’s momentum, with liquidity advantages reinforcing its status as the preferred safe haven.

Notably, gold, a traditional safe-haven asset, is losing its appeal. The strong dollar combined with rising US bond yields is exerting double pressure, preventing gold prices from rising even as geopolitical risks increase.

Politically, the pressure from rising oil prices is beginning to influence Republican internal dynamics. According to Reuters, regions with the most significant gasoline price increases are concentrated in the Midwest and South, including swing states supporting Trump in the 2024 election. As the midterm elections approach in November, persistently high energy prices could become a key political variable for the Republican Party.

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