Iran Just Launched a Surprise Missile Attack on U.S. Forces, Ending the Ceasefire Lull. Here's What It Means for Oil Stocks.

Oil prices have surged back above $90/barrel after Iran launched a surprise attack on U.S. forces in the Middle East on Wednesday morning. Further increases were expected as President Trump vowed to retaliate against Iran for the ballistic missile attack on a U.S. military base in Jordan.

“We’ll be hitting them hard. They’re going to get a beating,” Trump told Fox News in an interview.

Benchmark Brent Crude futures, which briefly topped $100/barrel last week following the collapse of the U.S.-Iran ceasefire, had been falling in recent days as the U.S. paused its bombing campaign to reassess its strategy. On Tuesday, they hit a two-week low of $84.09.

Here’s what the renewed hostilities mean for the stock market, and oil stocks in particular.

Image source: Getty Images.

Diverging pathways

Since the start of the war in Iran on Feb. 28, the S&P 500 and oil prices have moved in opposite directions, with the S&P 500 declining through February and March as oil prices rose. The index hit its lowest point for the year in late March, just before Brent Crude spot prices peaked above $125/barrel in early April.

As oil prices trended downward from April to June, the S&P 500 rallied to new all-time highs, but the recent spikes in oil prices have knocked it down 2.6%.

In general, the stock prices of U.S. oil companies like Chevron (NYSE:CVX) and Devon Energy (NYSE:DVN) have tracked oil prices rather than the broader market. They’ve moved up as oil prices have risen and down as those prices declined. That makes sense, because most of their operations aren’t located in areas directly affected by the war or the closure of the Strait of Hormuz. They benefit from the higher global oil prices without being hurt by supply constraints.

While this latest spike is likely to continue the trend of oil company stocks rising with oil prices, it could have a very different impact several weeks from now, for one important reason.

The Fed keeps rates steady... for now

While oil prices, stock prices, and oil stock prices have reacted to the Iran war in predictable ways for the last six months, this particular escalation in violence came mere hours before the Federal Reserve’s July Open Markets Committee meeting, at which benchmark interest rates are set.

Federal Reserve Chair Kevin Warsh. Image Source: Federal Reserve.

The Fed ultimately left interest rates unchanged. But the 9-3 vote wasn’t unanimous, and several Fed governors have recently raised concerns about the ongoing conflict’s impact on inflation, with Cleveland Fed president Beth Hammack writing in a LinkedIn post, “Inflation is too high.” Meanwhile, Federal Reserve Vice Chair Philip Jefferson told the Stanford Institute for Policy Research that he would consider raising rates if “actual inflation does not start to cool down soon.”

If the war in Iran continues to regularly inflate the price of oil above $90/barrel through the Fed’s next Open Markets Committee meeting in mid-September, it makes an interest rate hike much more likely. An interest rate hike is likely to negatively affect all stocks, including oil stocks, regardless of oil prices.

So while today’s oil price spike is likely to give a short-term boost to oil stocks, sustained high prices from a prolonged war are the last thing that energy investors should be hoping for.

John Bromels has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.