Brent crude climbed to $86.65 a barrel on Tuesday as renewed conflict between the US and Iran heightened fears of supply disruptions and inflation.
Image: Noah Martin / Various Sources / AFP
Brent crude oil climbed to $86.65 a barrel on Tuesday afternoon, its highest level in more than a month, as renewed military strikes between the United States and Iran intensified concerns over energy supplies through the Strait of Hormuz and heightened fears of a fresh wave of global inflation.
The sharp rise in oil prices weighed on investor sentiment across global equity markets, with analysts warning that prolonged disruptions in one of the world's most important shipping routes could keep inflation elevated and force central banks to maintain tighter monetary policy for longer.
Bianca Botes, Managing Director at Citadel Global, said geopolitical developments were driving a cautious tone across financial markets.
"Tuesday morning, US futures continued to signal caution, hinting that the volatility may persist as traders reassed their positions. Asian markets mirrored the sentiment, with the tech heavy Korea Composite Stock Price Index plummeting by 2.5%. Japan's Nikkei also felt the pressure, falling by 1%. This synchronicity in market reactions across continents highlights the global interconnectedness of financial systems, where local events can dramatically sway investor sentiment worldwide," Botes said.
She said rising oil prices reflected growing concern over possible supply disruptions.
"Amid this market turmoil, there was a silver lining as Chinese trade data surprised analysts by exceeding expectations. However, attention now shifted towards local gold and mining production figures, as well as a crucial US inflation reading that could further influence market dynamics. Economic observers are also keen to hear statements from central bank officials that may offer guidance on future monetary policy shifts."
The South African rand also came under pressure as investors moved away from riskier assets.
On Tuesday afternoon it traded at R16,45 to the US dollar, R18,75 to the euro and R21,99 to the pound.
Neil Wilson, Saxo UK Investor Strategist, said oil markets had reacted sharply after fresh military action in the Middle East and the United States' decision to reinstate its naval blockade in the Strait of Hormuz.
"European stock markets fell with oil prices jumping to $85 on a fresh wave of military strikes by the US and Iran over control of the Strait of Hormuz, reigniting worries about stagflation."
He said Wall Street had also weakened after renewed geopolitical uncertainty and continued pressure on technology stocks.
Wilson said Brent crude had broken through key technical resistance levels as markets priced in greater geopolitical risk.
"Crude prices spiked on the renewal of conflict and worries about the Strait seizing up again, with Brent futures clearing out stops at the 200-day moving average at $79 and the round number resistance at $80 to clear $85 this morning, its highest level in a month."
By Tuesday afternoon, Brent crude had extended those gains to $86,65 a barrel, reflecting persistent concerns that instability in the Strait of Hormuz could disrupt global oil flows.
Despite the rally, Wilson said oil prices were unlikely to move substantially above $90 a barrel unless energy exports through the Strait were materially disrupted.
"As noted last week with oil longs having been cleared out by the steady decline since the middle of May there was scope for a fresh run up, although it seems unlikely at present that we get much beyond $90 unless there is a material breakdown in flows."
Markets are also becoming increasingly concerned about the inflationary consequences of higher energy prices.
Wilson said sovereign bond yields had climbed sharply as investors anticipated a more hawkish response from central banks.
"Sovereign bond yields have shot higher on renewed inflation concerns as markets price in a hawkish policy response from central banks to front end rates."
He added that although the latest escalation would not be reflected in Tuesday's US inflation data, continued disruption to energy markets would almost certainly keep price pressures elevated.
"The latest flare up will not show up in the key US CPI print, but it's a given that prolonged low level conflict and disruption to energy flows will mean stickier inflation."
Meanwhile, stronger than expected Chinese trade figures offered some support to global growth expectations, with exports rising 27% year on year and imports increasing 36% in June, driven by robust demand for artificial intelligence related hardware and semiconductor products.
However, Wilson noted that China's crude oil imports had fallen to near decade lows as domestic demand weakened, raising questions about whether lower Chinese demand could partially offset supply concerns in global oil markets.
With investors awaiting the latest US inflation figures and further comments from central bankers, markets are expected to remain highly sensitive to developments in the Middle East, particularly any changes to shipping activity through the Strait of Hormuz, which carries roughly one fifth of global oil trade.
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