Investors unnerved as Israel-Iran conflict fuels oil market rally

By Saqib Iqbal Ahmed, Suzanne McGee and Linda Pasquini

NEW YORK/GDANSK (Reuters) -Investors were on edge as financial markets reopened on Sunday, with crude oil prices initially up near 4% as markets were gripped by the escalating threat of a sweeping conflict in the Middle East. U.S. stock futures opened marginally lower.

Israel and Iran launched fresh attacks on each other on Sunday, killing and wounding civilians and raising concerns of a broader regional conflict, with both militaries urging civilians on the opposing side to take precautions against further strikes. Yemen's Iran-aligned Houthis joined the fray.

Images from Tehran showed the night sky lit up by a huge blaze at a fuel depot after Israel began strikes against Iran's oil and gas sector - raising the stakes for the global economy and the functioning of the Iranian state.

"The market is very headline-driven and short-term focused, so there's just a lot of volatility over the near term," said Kathryn Rooney Vera, chief market strategist at StoneX Group.

Brent crude futures prices added just under 4% to trade near $76.94 after resuming trading on Sunday, having risen 7% on Friday as Israel and Iran first traded strikes. They later pared gains to trade up $2.14 at $76.37.

"It is noteworthy that while the Israelis have attacked Iran's natural gas processing facility, which fuels its power grid, it hasn't as of now hurt its oil export facilities," said Eric Beyrich, portfolio manager at Sound Income Strategies. Of the early market moves, he said "this could all change as the day unfolds."

Israel's air offensive against Iran that began early on Friday, killing commanders and scientists and bombing nuclear sites in a stated bid to stop Tehran from building an atomic weapon, knocked risky assets including stocks, on Friday. It also lifted oil prices and prompted a rush into gold and the dollar, which resumed its role as a safe-haven asset for the first time in months. 

Rallying oil prices pose a risk to the inflation outlook, as central banks around the world grapple with the impact on prices from Trump's trade tariffs and the effect on economic growth.

Rooney Vera at StoneX said she was worried about possible supply restrictions in case of a closure of the Strait of Hormuz, a narrow shipping lane between Iran and Oman. Any closure could restrict trade and further impact global oil prices.

"That could worsen inflationary pressures," she said.

Investors are skittish, and the S&P 500 appears to have stalled after rallying about 20% from its trade war-induced April low to near-record highs. Futures opened slightly lower on Sunday, with S&P 500 futures down 0.2% early in the overnight session.

"The equity market will breathe somewhat of a sigh of relief that Iranian military muscle is not at the level that some of us feared," said Jack Ablin, chief investment officer of Cresset Capital. Meanwhile, protests, organised by the "No Kings" coalition to oppose Trump's policies, and the assassination of a Minnesota state lawmaker on Saturday, added to downbeat sentiment.

“It’s more of an oil story than an equity story at this point,” said Jim Carroll, senior wealth adviser and portfolio manager at Ballast Rock Private Wealth. “Stocks right now seem to be hanging on."

The Cboe Volatility Index, often called the Wall Street "fear index," finished at 20.82 on Friday, its highest close in three weeks.

(Reporting by Suzanne McGee, Saqib Iqbal Ahmed and Davide Barbuscia in New York, and Linda Pasquini in Gdansk; Editing by Alden Bentley, Richard Chang, Amanda Cooper, Susan Fenton and Matthew Lewis)