US stock index futures dropped sharply on Monday as surging oil prices and escalating tensions in the Middle East heightened concerns about inflation and the risk of a broader economic slowdown.
Futures tied to the Dow Jones Industrial Average fell more than 523 points in early trading, while S&P 500 and Nasdaq 100 futures declined by more than 1% as investors reacted to a spike in energy prices and growing geopolitical uncertainty.
Oil prices surged above $100 per barrel as hostilities in the Middle East entered their tenth day, fueling fears that prolonged disruptions to global supply could push inflation higher and complicate monetary policy decisions.
Markets are also grappling with political developments in Iran after the country named Mojtaba Khamenei as the successor to Supreme Leader Ali Khamenei, a move widely interpreted as a signal that hardliners remain firmly in control in Tehran.
Oil surge rattles markets
Energy markets were at the center of the latest volatility.
Crude prices jumped more than 25%, briefly climbing toward $120 per barrel before easing slightly following reports that Group of Seven finance ministers and the International Energy Agency may consider a coordinated release of emergency oil reserves.
Saudi Aramco also offered prompt crude supply through a series of rare tenders, which helped trim some of the gains in oil prices.
The surge in crude prices comes after major Middle East producers cut output while the critical Strait of Hormuz remained effectively closed.
Kuwait announced production cuts, while Iraq’s output has reportedly dropped about 70%.
Even after retreating from intraday highs, oil prices remained significantly elevated.
West Texas Intermediate crude traded above $100 per barrel for the first time since 2022, while Brent crude also climbed sharply.
Analysts warned that the oil shock could have broader economic consequences if the conflict drags on.
Chris Beauchamp, chief market analyst at IG, said markets were still digesting the implications of rising energy prices.
“Stock markets have raced to catch up to all the news, but we are now looking at a vastly increased chance of a US and global recession as inflation surges,” he said.
Travel, banking stocks lead losses
The sharp rise in oil prices hit sectors sensitive to fuel costs particularly hard.
Airlines and travel companies were among the biggest losers in premarket trading.
Alaska Air and United Airlines fell about 3%, while cruise operators Carnival Corporation dropped 3% while Norwegian Cruise Line declined 4%.
Large US banks were also under pressure, with JPMorgan Chase, Citigroup and Bank of America each falling more than 2%.
By contrast, energy companies benefited from higher crude prices.
Shares of Diamondback Energy and APA Corp climbed more than 2%, while Occidental Petroleum gained about 2%.
Defense stocks also bucked the broader market decline, with RTX rising around 1%.
Inflation fears cloud Fed outlook
The spike in energy prices has complicated the Federal Reserve’s policy outlook at a time when the labor market has shown signs of weakening.
Last week’s economic data pointed to softer job growth even as broader economic activity remained strong, raising concerns about a potential stagflationary environment marked by slower growth and rising inflation.
Higher oil prices could make it more difficult for the Federal Reserve to cut interest rates as quickly as investors previously expected.
Treasury markets reflected those concerns, with the yield on the two-year Treasury note briefly touching its highest level since late November as traders reassessed interest rate expectations.
Expectations for a June rate cut had strengthened after a weak jobs report on Friday.
However, traders are now pushing those expectations further out, with markets pricing potential easing closer to September or October.
Market volatility has also increased sharply. The Cboe Volatility Index, often referred to as Wall Street’s “fear gauge,” surged above 30 and reached its highest level since April.
US equities had already endured a difficult week prior to Monday’s declines.
The Dow Jones Industrial Average fell nearly 1% last week, marking its steepest weekly drop since early April 2025.
The S&P 500 lost about 1.3%, while the Russell 2000 recorded its biggest weekly decline since early August.
Investors now face a crucial week of economic data, including job openings figures, the Federal Reserve’s preferred inflation gauge in the personal consumption expenditures report, and a revised estimate of quarterly GDP, all of which could influence the market’s outlook for growth and interest rates.
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