Oil Jumps 3% As Fresh US-Iran Strikes Rattle Markets

By Chibuzor Alli

Oil prices rose by more than 2% on Monday after fresh US-Iran hostilities renewed fears over global energy supplies, particularly through the Strait of Hormuz.

West Texas Intermediate crude rose 2.5% to $85.51 a barrel, while Brent crude gained 2.8% to $90.53 a barrel.

The latest rise came a day after the United States said it had attacked Iranian rocket launchers on a small island in the Strait of Hormuz, marking its first strikes on Iran in a month.

Iran retaliated by attacking US military targets in Jordan.

The exchange came as the US-Iran war entered its sixth month, after tensions had appeared to be easing.

The renewed hostilities have raised concerns over the security of the Strait of Hormuz, through which about a fifth of global crude oil and gas supplies pass.

The waterway has remained largely closed, while peace talks between the two sides appear to have made little progress.

US officials this month vowed the “economic asphyxiation” of Iran to compel it to reopen the waterway.

“Hormuz is once again threatening to put a floor under oil just as Warsh is putting a ceiling on how much inflation patience markets should assume from the Fed,” said Quintex Intel’s Stephen Innes.

“For oil traders, the move is another reminder of how quickly the geopolitical premium can return.

“Physical flows through Hormuz have improved materially from their worst levels, which is precisely why crude had started giving back some of the fear premium, but the latest exchange shows how fragile that progress remains and how quickly the shipping story can be pushed back onto the trading desk.”

Inflation and US interest rates

Higher energy prices are adding to inflationary pressures as investors assess whether the US Federal Reserve could raise interest rates.

Inflation in the US currently stands at 3.7%, nearly double the Fed’s 2% target.

At the Jackson Hole symposium of central bankers and economists in Wyoming, Fed boss Kevin Warsh warned that the central bank still had work to do to bring inflation under control.

Warsh said, “We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do.”

He described the rise in inflation as “concerning” and said he would be “hard-pressed” to describe current financial conditions as “restrictive”.

The comments were seen by investors as a possible indication that higher borrowing costs could be on the horizon.

However, Warsh stopped short of explicitly supporting an interest rate increase.

“I stand here today committed to a discipline, not to a decision.”

The remarks came after all three main Wall Street indexes fell on Friday.

Short-term US Treasury yields, which reflect expectations about monetary policy, rose sharply, while the dollar strengthened against other major currencies. Gold, which tends to benefit from lower interest rates, fell.

Investors are now awaiting key economic data before the Fed’s next interest rate decision.

Jobs data is due this week, followed by consumer price index figures next week.

“Should we get an inline payrolls print that does not give the Fed too much to work with, next week’s core CPI report will become the major decider for the market’s Fed belief system,” wrote Chris Weston at Pepperstone.

“The volatility priced around that outcome across rates, forex and equities could therefore be significant.”

David Chao of Invesco said the Jackson Hole meeting had increased the possibility of a rate hike but argued that a September increase was still unlikely.

“While Jackson Hole has increased the possibility of a rate hike, I don’t think a September rate hike is in the books.

“Chair Warsh wants to reduce forward guidance, and he stopped short of explicitly signalling a September move. The upcoming inflation and labour market reports will be critically important.”

Asian markets mixed

Asian markets were mixed on Monday as investors assessed the renewed geopolitical risks and the outlook for US monetary policy.

Tokyo, Hong Kong, Sydney, Taipei, Jakarta and Mumbai ended lower, while Seoul, Shanghai, Singapore, Bangkok and Wellington closed higher.

At around 0715 GMT, Tokyo’s Nikkei 225 was down 0.1% at 66,311.93 points at the close, while Hong Kong’s Hang Seng Index fell 0.2% to 25,530.19 points.

Shanghai’s Composite Index rose 0.9% to 3,986.30 points.

European markets were also mixed at the open, with Paris rising and Frankfurt falling. London’s FTSE 100 was closed for a public holiday.

The dollar fell to 159.87 yen from 160.07 yen on Friday, while the euro slipped marginally to $1.1586.

The pound rose to $1.3538, while the euro traded at 85.57 pence against the pound, compared with 85.58 pence on Friday.

On Wall Street, the Dow Jones Industrial Average closed flat at 53,559.99 points.

With oil prices rising again, investors face a renewed challenge: the geopolitical shock from the Iran conflict could push energy costs higher just as the Federal Reserve weighs how aggressively to respond to persistent inflation.