Markets seen on edge after drone attack kills U.S. troops, escalates Mideast crisis

A drone attack that killed three U.S. service members in northern Jordan, blamed by the White House on Iran-backed militants, marks a major escalation of tensions in the Middle East and appeared likely to draw a reaction when financial and commodity markets open for the week.

Oil prices are likely to rise when futures trading begins Sunday evening, analysts said.

Much will ultimately depend on the U.S. response and whether Iran takes action aimed at shutting down the Strait of Hormuz, Tariq Zahir, managing member at Tyche Capital Advisors, told MarketWatch on Sunday afternoon.

“We are on the cusp of this escalating, which could seriously impact the flow of crude oil,” he said.

Three U.S. service members were killed and more than two dozen injured in a drone strike on a U.S. base in northeast Jordan, according to U.S. Central Command. They were the first U.S. fatalities in months of attacks on U.S. bases by Iran-backed militias since the start of the Israel-Hamas war in October.

President Joe Biden attributed the Sunday attack to an Iran-backed militia group and said the U.S. “will hold all those responsible to account at a time and in a manner (of) our choosing.” News reports said U.S. officials were still working to conclusively identify the precise group responsible for the attack, but have assessed that one of several Iranian-backed groups is to blame.

Some congressional Republicans called for direct retaliation on Iran.

“We must respond to these repeated attacks by Iran & its proxies by striking directly against Iranian targets & its leadership. The Biden administration’s responses thus far have only invited more attacks. It is time to act swiftly and decisively for the whole world to see,” wrote Sen. Roger Wicker of Mississippi, the senior Republican on the Senate Armed Services Committee, in a post on X.

Oil futures rallied last week, but with gains attributed in part to production outages in the U.S. and more upbeat expectations around economic growth.

Oil prices have seen short-lived rallies around developments in the Middle East since the start of the Israel-Hamas war, but have failed to build in a lasting geopolitical risk premium. West Texas Intermediate crude
CL00,
+0.28%

CL.1,
+0.28%,
the U.S. benchmark, remains around $15 below its 2023 peak in the mid-$90s set in late September. Brent crude
BRN00,
+0.08%,
the global benchmark, pushed back above $80 a barrel last week.

Attacks by Iran-backed Houthi militants on Red Sea shipping have forced a rerouting of tankers and cargo ships. For crude, that’s had implications for the physical market but hasn’t interrupted the flow of crude from the Middle East.

A move by Iran aimed at closing off the Strait of Hormuz, the world’s biggest oil-transportation chokepoint, remains a top worry.

The strait is a narrow waterway that links the Persian Gulf with the Gulf of Oman and the Arabian Sea. At its narrowest point, the waterway is only 21 miles wide, and the width of the shipping lane in either direction is just two miles, separated by a two-mile buffer zone.


Energy Information Administration

Around 21 million barrels a day of crude moved through the waterway in the first half of 2023, equivalent to around a fifth of daily global consumption, according to the U.S. Energy Information Administration.

The U.S. stock market has largely looked past Middle East tensions, with the S&P 500
SPX
returning to record territory this month, while the Dow Jones Industrial Average
DJIA
has also set a series of records.

Read: Stock-market rally faces Fed, tech earnings and jobs data in make-or-break week

Away from oil, markets will be watched for any knee-jerk rallies in assets and instruments that traditionally serve as havens during periods of increased geopolitical tension, including U.S. Treasurys
BX:TMUBMUSD10Y,
the U.S. dollar
DXY
and gold
GC00,
+0.04%.

—Associated Press contributed.

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