Oil prices extended their recent surge on Tuesday as hopes for a quick resolution to the U.S.-Iran standoff over the Strait of Hormuz weakened, raising fresh concerns about inflation and the possibility of further interest rate increases.
Crude prices have risen by about 10 per cent over the past week as Washington and Tehran appear no closer to reaching an agreement that could lead to the reopening of the crucial shipping route.
Brent crude futures were down marginally at $87.62 a barrel by 0405 GMT, while U.S. West Texas Intermediate crude slipped to $82.08.
Despite the slight pullback, both benchmarks remained sharply higher after climbing about five per cent on Monday.
The Strait of Hormuz is a critical artery for global energy supplies, making prolonged disruption a major concern for oil markets and the wider global economy.
The latest setback came after U.S. President Donald Trump said on Monday that he would seek compensation from Iran as part of any peace negotiations.
Trump cited attacks and killings allegedly backed or carried out by Tehran over several decades.
His position came in response to Iran’s demand for U.S. war reparations as a condition for resolving the crisis.
The comments followed Trump’s earlier suggestion that he was “low-keying” his approach to the conflict, raising expectations that economic pressure could take precedence over further military action.
Instead, the latest exchange appears to have complicated prospects for a swift agreement.
“In the absence of any positive headlines on negotiations to reopen the strait, pressure on oil prices has been upward,” wrote Jason Wong at BNZ.
Stephen Innes, global strategist at Quintex Intel, described the confrontation as an attempt by both sides to use energy supplies as leverage.
“In effect, both sides are trying to weaponise the oil barrel without firing another shot,” Innes said.
“Washington is trying to choke Iran’s ability to get its crude out, while Tehran is squeezing the artery through which everybody else’s crude gets through.”
“It is quite the game of chicken.”
The prospect of crude prices remaining elevated has also revived concerns about inflation, with markets increasingly weighing the possibility of higher US interest rates.
A larger-than-expected loss of more than 20,000 jobs in the US economy last month had eased expectations of further rate increases.
However, a sustained rise in energy prices could complicate the Federal Reserve’s efforts to control inflation.
President Beth Hammack told Yahoo Finance that a single 25-basis-point rate move would probably have only a limited impact on the economy.
“I would say in general, one 25-basis-point move probably doesn’t do a whole lot for the economy,” she said.
“So it’s probably some number of (movements). But I don’t want to prejudge what that number is going to be.”
Investors are now looking towards the release of U.S. consumer price data on Wednesday, which could provide fresh clues about the Federal Reserve’s next interest-rate decision.
Asian markets were mixed on Tuesday following a subdued session on Wall Street, with Shanghai, Wellington, Taipei and Manila recording losses, while Hong Kong, Sydney, Singapore and Seoul posted gains.
Tokyo markets were closed for a public holiday.
At about 0215 GMT, Brent crude was trading around $87.97 a barrel, while WTI stood at approximately $82.40.
The continuing uncertainty over the Strait of Hormuz means energy markets are likely to remain highly sensitive to developments in the U.S.-Iran standoff, with any sign of progress towards reopening the waterway potentially easing prices and renewed tensions likely to push them higher.
