Oil Surges Amid Middle East Risks

It’s been a topsy-turvy week of stock trading, and today is no exception: pre-market futures have fallen deep into the red this morning, threatening to kick off 2026 with two consecutive down months of trading. At this moment, the Dow is down -600 points, -1.21%, the S&P 500 -66, -0.96%, the Nasdaq -272, -1.09% and the small-cap Russell 2000 -42 points, -1.58%.

The reasons this morning are various: the odds of a U.S. military strike on Iran over the weekend have gone up from around +8% to +27%, wholesale inflation numbers show hotter inflation on core PPI, AI threats to the American workforce are increasingly front-of-mind, and major merger deals continue to dot the public landscape. Keep in mind we’re still near all-timer highs in the major market indexes from an historical perspective; as such, we can see today’s sell-off as something of a “re-positioning” ahead of the weekend.

PPI Inflation Increases in January

This morning, Producer Price Index (PPI) numbers for January have hit the tape, mostly hotter but ultimately mixed from the prior month. Headline PPI month over month reached +0.5% — 20 basis points (bps) higher than anticipated and the warmest print since September of last year. Core PPI (subtracting volatile food and energy prices) doubled expectations to +0.8%, up from an upwardly revised +0.6% from December.

Year over year, headline PPI on final demand actually ticked down 10 bps to +2.9% last month, though up slightly from expectations. Core PPI year over year rose to +3.6% from +3.3% reported a month ago, the biggest gains in nearly a year and higher than consensus estimates. Ex-food, energy and trade were slightly lower from the prior month: +0.3% and +3.4%, respectively. Even still, these figures are pointing toward inflation heating up, not cooling down.

Oil Prices Raise on Iran Tensions

With an increased U.S. presence near Iran this morning, risks to Middle Eastern oil supply look to be heating up. The Strait of Hormuz, in particular, is a very important piece of the global oil puzzle, and any U.S. strikes on Iran would likely jeopardize oil shipments from this key region. 

This is a shortcut way of explaining how oil prices have risen $2 per barrel (/bbl) just this morning so far to $67.70/bbl, the highest level since July of last year. We had been as low as $60.71 just two weeks ago, but conditions on the geopolitical scale have shifted. Again, look at the market’s reaction to this possibility as a thinking person’s hedge, not something necessarily permanent.

Corporate Events Transform Landscape

Without getting too deep in the weeds here, we see a couple major developments manifesting in early morning trading today. One is the $110 billion investment coming to OpenAI — still privately traded but now valued at an extraordinary $730 billion — including $50 billion from Amazon AMZN, which also announced a new multi-year partnership with the parent of ChatGPT. The march of AI continues, with concerns increasing about the labor market, a perceptible moral code, etc.

Meanwhile, Paramount Skydance PSKY — a merger in existence only since August of last year, when Larry Ellison’s son David bought the Paramount lot, CBS, Comedy Central, BET and more — has won its hostile takeover of Warner Brothers Discovery WBD as of yesterday, when Netflix NFLX pulled its bid to merge with the parent of CNN, HBO Max, Warner Brothers pictures, etc. The result is a price of roughly $110 billion — $31 per share to WBD shareholders, and covering the $2.8 billion breakup fee from dissolving the Netflix ties.

Also, Block XYZ shares are up +16% this morning, as CEO Jack Dorsey announces layoffs to nearly half its corporate staff, including Square, Cash App and Afterpay. This amounts to 4000 terminations, and the reason Dorsey gave is rather ominous: because AI can already do much of this work. He also said his company was guilt of over-hiring after the Covid pandemic, but it’s likely the AI/labor force component which will resonate.

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This article originally published on Zacks Investment Research (zacks.com).

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