Crude oil prices are easing after Brent briefly returned to $100 last week, following a pause in hostilities between the United States and Iran over the weekend. Even so, the war’s outcome remains highly uncertain, and the outlook for equity markets has weakened. Combined with Big Tech’s aggressive artificial intelligence spending and renewed warnings about shortages in energy commodities, the backdrop points to continued market volatility.

Last week brought an unusual cluster of negative developments that likely unsettled many bullish investors. In addition to the oil price spike, which was driven by the Middle East war spreading into the Red Sea after Yemeni Houthis attacked two tankers, growth-focused investors also had to absorb President Donald Trump’s latest tariff measures and a selloff in Big Tech shares after Alphabet, Google’s parent company, disclosed that it burned through $6 billion in cash in the second quarter because of its AI spending. According to the Financial Times, this was the first time Alphabet recorded negative quarterly cash flow since going public, a development that raised investor concern.

Taken together, Big Tech leaders now plan to spend more than $725 billion this year alone on their artificial intelligence strategies. That level of expenditure is enough to give many investors pause, especially because returns from AI investments have been slow to materialize. But there is another issue: Big Tech has become a major driver of global energy demand, and that translates directly into demand for energy commodities. As the companies building out AI infrastructure scale up data centers, they are not just competing for chips and capital, but also for the electricity and fuel needed to keep those facilities running.

After the Houthis declared a maritime blockade on Saudi Arabia last week and backed it up by striking tankers in the Bab el-Mandeb Strait, market participants had to confront the possibility that the Middle East war has spread beyond the Strait of Hormuz, which remains heavily disrupted as well. That means more barrels are being prevented from reaching global markets. In parallel, the war in Ukraine has also taken a negative turn, with Ukrainian drone attacks on the Caspian Pipeline Consortium network prompting a sharp cut in Kazakh oil production. Together, these developments have affected as much as a quarter of the world’s oil and a substantial share of global gas supply.

That is a troubling setup for Big Tech, which is already facing tight energy availability as it expands AI data centers. Any further disruption to energy commodity supply would likely make the problem worse and push companies to spend even more. Higher oil and gas prices also feed broader inflation, since energy costs sit at the base of nearly every other cost in the economy. That makes the issue relevant well beyond the technology sector, because the same inputs that pressure data-center operators can also ripple through shipping, manufacturing, and consumer prices.

“The conflict has entered a decidedly more dangerous phase,” Helima Croft, head of global strategy at RBC Capital Markets, said last week, as quoted by CNN. “It could shift the sentiment of ‘the market always finds a workaround’ camp.” That warning matters because the view Croft described has been widely held. Reports of de-escalation in Hormuz have repeatedly pushed oil prices lower, creating a sense of security that could leave markets more exposed if a larger oil and gas supply shock develops.

Bearish oil scenarios have continued to fade. China reduced imports and drew down inventories to absorb the first shock, but those stockpiles are finite. Concern in China appears to be growing as well, reflected in the 4% drop in oil prices last Friday after Reuters reported that China was pressing for peace. Rather than simply selling into the decline, traders may need to consider what it means that China is worried about a war in the world’s largest oil-producing region. The longer the conflict lasts, the tighter supply becomes.

Inventories are also being depleted around the world. Governments rushed to release millions of barrels from stockpiles in an effort to limit retail fuel price increases. That helped in the short term, but inventories will have to be replenished, and there is less room to do so given war-related inflation. CNBC reported that the Iran war is costing the average American household about $1,200 a year, citing Moody’s Analytics chief economist Mark Zandi.

“I just don’t see how oil is going to really impact the hyperscalers,” the chief market strategist of F.L. Putnam told Bloomberg last week. But oil can affect hyperscalers directly, as well as the investors betting on hyperscaling as the main growth engine. Beyond the immediate strain of tighter gas markets and the turbines needed to power data centers, higher oil prices lift the cost of nearly everything else, from food to semiconductors and other equipment.

By Irina Slav for Oilprice.com

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