By Ayo Kehinde
Oil prices responded sharply on Monday after renewed military exchanges between the United States and Iran, rising above $91 per barrel and reviving concerns about crude supply disruptions through the Strait of Hormuz.
Brent crude, the global benchmark, rose 3.4 percent to $91.10 a barrel, while US West Texas Intermediate (WTI) gained 3.6 percent to $86.40, according to the latest market report.
The rally followed a US attack on Iranian rocket launchers on Larak Island in the Strait of Hormuz, marking the first known American strikes on Iran since late July. Iran subsequently retaliated by attacking US military bases in Jordan, according to Iranian media reports.
The renewed hostilities have raised fresh concerns over the security of the strategic waterway, through which about one-fifth of global oil supplies passed before the conflict began. Shipping activity through the strait has also fallen sharply as operators remain cautious over security risks.
The latest escalation comes after oil prices had retreated in recent sessions as markets became more optimistic about efforts to restore shipping through the waterway.
Monday’s military exchanges have reversed some of that optimism, bringing the geopolitical risk premium back into crude prices.
UBS analyst Giovanni Staunovo said renewed military strikes and concerns about further supply disruptions had lifted oil prices, with markets now focused on whether the situation would de-escalate.
The development is significant for global energy markets because a prolonged disruption to the Strait of Hormuz could restrict supplies, increase freight costs and push crude and refined-product prices higher.
The oil rally is also complicating the US Federal Reserve’s battle against inflation, as higher energy costs could make it more difficult to bring inflation back towards the central bank’s 2 percent target.
Markets were already reassessing the outlook for US interest rates following comments from Fed official Kevin Warsh at the Jackson Hole symposium.
Warsh said the Federal Reserve must be confident that underlying inflation is moving towards its target at a sufficient pace, describing the current inflation situation as concerning.
He also said he would be “hard-pressed” to describe current financial conditions as restrictive, raising speculation that interest rates could remain higher for longer or even increase.
However, Warsh stopped short of committing to a rate hike, saying he was committed to discipline rather than a specific decision.
Investors will now focus on upcoming US employment and inflation data for clues about the Fed’s next move.
The combination of higher oil prices, renewed geopolitical risks and uncertainty over US interest rates is likely to keep financial markets volatile, with the immediate focus on whether fighting between Washington and Tehran threatens to further restrict oil flows through Hormuz.
For oil traders, the key question is therefore no longer simply whether prices can remain above $90, but how long the renewed geopolitical risk premium will remain embedded in crude prices.
