US stocks trim much of an early drop as market remains twitchy after oil spikes to nearly $120

The S&P 500 fell 0.6% after dropping as much as 1.5% in the morning. The Dow Jones Industrial Average was down 492 points, or 1%, as of 1:50 p.m. Eastern time, and the Nasdaq composite fell 0.3% after sliding as much as 1.5% earlier.

Since the war with Iran began with attacks by the United States and Israel, the central worry for financial markets has been how high oil prices will go because of it and how long they will stay there. Early Monday, the price for a barrel of Brent crude, the international standard, briefly touched $119.50. It hasn’t been that expensive since the summer after Russia invaded Ukraine in 2022, another military conflict that likewise raised the risk for blockages in the global flow of oil.

If oil prices stay very high for very long, households’ budgets already stretched by high inflation could break under the pressure. Companies, meanwhile, would see their own bills jump for fuel and to stock items on their store shelves or in their data warehouses. It all raises the possibility of a worst-case scenario for the global economy, “stagflation,” where growth stagnates and inflation remains high.

To be sure, oil prices quickly pared their huge gains Monday. A barrel of Brent crude pulled back to $98.75, though that’s still up 6.5% from Friday.

A barrel of benchmark U.S. crude, meanwhile, rose to 4% to $94.55 after briefly spiking as high as $119.48.

The U.S. stock market has a history of bouncing back relatively quickly from past military conflicts, such as Russia’s invasion of Ukraine in 2022, as long as oil prices don’t stay too high for too long. And even with all the recent swings in the market, the S&P 500 index that sits at the heart of many 401(k) accounts is still within 4% of its record set in January.

Some professional investors continue to suggest that drops in prices for stocks could ultimately offer opportunities to buy them at cheaper levels before they rise again. Monday's quick paring of losses for U.S. stocks was similar to the huge swings that rocked Wall Street last week, with everything keying off changes in oil prices.

“We continue to believe that the current acute shortage of oil will be reversed in the coming months as new supply comes online and oil should drop significantly,” according to Sameer Samana, head of global equities and real assets at Wells Fargo Investment Institute.

All that hinges, though, on the flow of oil returning toward normal. At the moment, it’s far from that.

Consider the Strait of Hormuz, a narrow waterway off Iran’s coast that a fifth of the world’s oil sails through on a typical day. Now, tanker traffic has all but stopped because of worries about a possible attack by Iran.

If the strait remains closed for only a few weeks, the price of oil could push to $150 per barrel of higher, according to oil and gas strategists at Macquarie Research.

“Although we are not attempting to predict how long Hormuz transit will be substantially or completely curtailed, we are growing more confident that without an agreement and a fast cessation of all kinetic activity, the crude market will begin to break in days, and not in weeks or months,” the strategists led by Vikas Dwivedi wrote in a report.

The most immediate pain on Wall Street is hitting companies that have already big fuel bills.

Carnival lost 3.4% because it has to fill huge cruise ships with fuel and United Airlines sank 3.2%.

Helping to limit the U.S. stock market's losses was Live Nation Entertainment, which rose 4.2%. The company behind Ticketmaster reached a settlement with the U.S. Justice Department in a case alleging an illegal monopoly over live events in the country.

In stock markets abroad, where economies are more dependent on the import of oil and natural gas, stocks fell even more. South Korea’s Kospi sank 6%, Japan’s Nikkei 225 tumbled 5.2% and France’s CAC 40 dropped 1%.

A Chinese special envoy to the Middle East, Zhai Jun, called for an end to the attacks and said strikes on non-military targets and civilians should be condemned. Meanwhile, South Korean President Lee Jae Myung warned against hoarding, panic buying and collusion between refiners and gas stations.

Both sides in the war struck new targets over the weekend, including civilian ones. Bahrain accused Iran of hitting one of the desalination plants that are crucial for drinking water in Gulf countries. Its national oil company declared force majeure after the country’s sole oil refinery was attacked. Israel struck oil depots in Tehran, sending up thick smoke and causing environmental alerts.

President Donald Trump said late Sunday that high oil prices at the moment are worth the cost.

“Short term oil prices, which will drop rapidly when the destruction of the Iran nuclear threat is over, is a very small price to pay for U.S.A., and World, Safety and Peace,” he said in a posting on his social media network.

In the bond market, the yield on the 10-year Treasury fell to 4.13% from 4.15% late Friday.

Worries about high inflation and oil prices are pushing upward on Treasury yields, and the 10-year yield was above 4.20% early Monday. But worries about a potentially slowing economy are pulling downward at the same time. On Friday, a discouragingly weak report on the U.S. job market showed that employers cut more jobs last month than they added.

AP Writers Matt Ott, Kim Tong-hyung and Elaine Kurtenbach contributed.