European markets plunged in early trade. Germany’s DAX 30 (DAX) and France’s CAC 40 (CAC40) both fell by more than 3%. London’s FTSE 100 (UKX) was down nearly 2%. The sell-off followed big losses in Asia. Hong Kong’s Hang Seng (HSI) Index sank as much as 5% before closing down 3.9%, its worst daily drop in seven months. Japan’s Nikkei 225 (N225) tumbled nearly 3% and China’s Shanghai Composite dropped more than 2%.
On the US market, Dow futures fell 480 points, or 1.4%. S&P 500 and Nasdaq futures were down 1.6% and 1.8% respectively.
The latest market turmoil came as US crude futures surged 6% to trade at $123 a barrel, the highest level since August 2008. Brent crude briefly spiked as high as $139 a barrel before easing back to $125, still up more than 6%.
Oil prices surged after US Secretary of State Antony Blinken said Sunday in an interview with CNN that the United States is working with its allies in Europe to look into the possibility of banning Russian oil imports in an effort to further punish the country.
“In the event of any implementation [of the ban], the move will further exacerbate the supply-demand imbalance in an already tight oil market,” wrote Yeap Jun Rong, a market strategist for IG Group.
“Elevated oil prices may pose a threat to firms’ margins and consumer spending outlook, at a time where the Fed will face greater pressure of having to overcorrect with quicker and larger rate hikes in light of inflationary pressures,” he added.
The West has thus far gone out of its way to avoid penalizing Russian oil directly, but uncertainty over sanctions has already caused many refiners, traders, shippers and banks to steer clear of Urals crude, the country’s benchmark export grade.
JP Morgan estimates more than 4 million barrels per day of Russian oil has already been effectively sidelined, sending oil and gasoline prices skyrocketing in recent days.
The European Union is much more reliant than the United States on Russian crude — it accounts for about 27% of all oil imports into the 27-country bloc. But the global pricing of oil means American consumers also suffer from supply shocks. The average US price for regular gas hit $4 a gallon on Sunday.
Oil markets have been speculating recently that a nuclear deal with Iran could alleviate some of the upward pressure on prices by allowing the OPEC member country to export more crude. But talks with world powers including the United States, Russia and China were mired in uncertainty on Sunday following Russia’s demands for a US guarantee that the sanctions it faces over the Ukraine conflict will not hurt its trade with Tehran, Reuters reported.