ASX Set for Another Red Day as Oil Shock Rattles Markets

Oil Above US$100 Has Markets Repricing Risk Fast

It looks like there is a strong chance the ASX has another big red day after Wall Street sold off sharply again, with oil prices continuing to rattle markets as the US-Iran conflict escalates. This is not just another weak session for investors. It is a broader repricing of risk as markets try to work out what a prolonged Middle East conflict could mean for the global economy.

For us, the key is not trying to predict exactly how long this lasts or what happens next. History shows oil prices can rise and fall sharply in both directions. What we are already seeing, though, is a broader repricing across energy markets, with higher oil prices flowing through not just into the commodity itself, but also into the earnings expectations and valuation multiples of oil and gas companies.

The ASX tends to follow the US market closely, and all three major indices were hit. The S&P 500 fell 1.5%, the Nasdaq dropped 1.8%, and the Dow lost 1.6%. Tech was hit harder again, which is typical in inflation and energy shock environments, and this could be the start of a deeper pullback after such a strong run.

Crude surged 10% to above US$96 per barrel, while Brent moved through US$101 for the first time since August 2022. That tells us fear is building in market sentiment and that traders are starting to price in a more prolonged conflict. At the same time, we would still be careful about becoming too definitive, because oil markets can reverse quickly and sentiment can shift just as fast.

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Why Oil Is the Central Issue

The IEA estimates the conflict has disrupted 7.5% of global oil supply, making this one of the largest oil shocks in modern history. That creates more uncertainty for the global economy, and uncertainty is exactly what markets hate because it makes future earnings, inflation, and growth much harder to judge.

What looked like a healthy growth year in January and February has now become far less certain. A sustained oil shock of this magnitude has historically increased recession risk, and with the S&P 500 trading on more than 21x forward earnings, there is not much margin for error if growth expectations need to be revised lower.

That is especially important because so much of the market is still trading at premiums based on future growth expectations. When valuations are stretched and the macro outlook becomes less clear, the market starts to feel like it is walking a tightrope.

What this means for investors

If we think about different industries, transport and logistics companies are among the most exposed because higher fuel costs flow directly into margins and earnings. That often leads to downgrades. While this may not be a long-term structural issue over the next three to five years, near-term cash flows are likely to become much more volatile. If we own transport or logistics stocks, it is worth looking back at what happened in 2022 to get a better sense of how margins and earnings can be affected in this kind of environment.

For oil and gas companies, higher energy prices are clearly a tailwind. The problem is that many of these stocks can run hard and quickly, and buying into them at all-time highs brings its own risk. If oil reverses sharply, the downside can be just as fast, and that is when investors get caught out.

It is also not just about specific sectors. If inflation keeps rising, and the RBA continues talking about rate hikes, growth stocks are likely to be hit harder. Higher rates compress valuations, put pressure on sentiment, and slow the economy more broadly.