What to expect from oil markets amid U.S.-Iran tensions: Experts

Paul Sankey of Mizuho and CNBC Contributor Scott Nations join "Squawk Alley" to put the move in energy stocks into context in light of the drone strike that killed an Iranian general.

Stocks fell on Friday after the U.S. confirmed that an airstrike killed Iran’s top military commander, sending oil prices surging and ratcheting up geopolitical concerns.

The Dow Jones Industrial Average closed 233.92 points lower, or 0.6% at 28,634.88 and posted its biggest one-day loss since early December. The S&P 500 also had its worst day in a month, sliding 0.7% to 3,234.85. The Nasdaq Composite dropped 0.8% to 9,020.77. The Dow briefly dropped more than 360 points at the open. The major averages recovered some ground later in the session as oil prices came off their lows.

U.S. crude oil futures settled up 3% at $63.05 per barrel and briefly gained 4.8%, raising concerns about an energy shock on the global economy. Airline stocks fell broadly on the threat of higher oil prices. United, American and Delta all dropped more than 1.6%.

“Global oil markets will be volatile for weeks to come,” said Greg Valliere, chief U.S. policy strategist at AGF Investments, in a note. “There’s a reason, finally, for caution in the stock market.”

“Eventually there will be an uneasy truce ... But that’s a long, long way off; this will get worse before it gets better,” he added.

Energy stocks such as Concho Resources and Apache went up 3.7% and 1.3%, respectively. Devon Energy climbed 1.2%.

A weaker-than-expected reading on the manufacturing economy also weighed on stocks. December’s ISM manufacturing index came in at 47.2, the weakest in a decade and smaller than the 49 reading expected by economists polled by Dow Jones.

Investors largely fled risk assets such as stocks in favor of gold and Treasurys and other traditional safe havens. Gold futures jumped more than 1%. The benchmark 10-year Treasury yield, which moves inversely to the price, dropped to around 1.79%.

The U.S. announced late Thursday that it had killed Iran’s top commander, Gen. Qasem Soleimani, in Baghdad in an airstrike. Soleimani had been a key figure in Iranian politics, and his death has raised concerns over a potential retaliation from the Iranian forces.

Iranian Foreign Minister Mohammad Javad Zarif warned on Friday that Iran would retaliate against the U.S. for its actions.

“It’s a game-changer,” Dryden Pence, chief investment officer at Pence Wealth Management, told CNBC’s “Squawk Box” on Friday. “We now have vast, broader array of weapons systems that the president has at his disposal. We’ve been able to weaponize economic sanctions now where we can go after individuals … but now I think the ultimate sanction that the president is able to use is an airstrike.”

Pence added, however, that any market volatility “will be short-lived.”

Wall Street loaded up on safer assets on fears that an oil spike might spark a recession. That risk is also heightened by the fact that the global economy has been struggling amid a global manufacturing slowdown.

The market moves come after U.S. equities rose to all-time highs on Thursday on the back of a strong performance in the tech sector. The Dow surged more than 300 points on Thursday, while the S&P 500 and Nasdaq gained 0.8% and 1.3%, respectively.

That performance added followed the strong gains from 2019. The S&P 500 rallied nearly 29% in 2019, its best annual performance since 2013. The Nasdaq surged 35.2% last year while the Dow climbed 22.3%.

However, the optimism entering the new year seems to be fading amid political tensions, including North Korea and the impeachment of President Donald Trump.

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