Oil prices experienced significant volatility after US strikes on Iran's main export hub, Kharg Island, an escalation in the ongoing conflict. Brent crude, which initially popped, eased off but remained above $100 a barrel, after briefly reaching $127 a barrel previously. US oil prices had also ended a session above $100 a barrel for the first time since the war began, reaching their highest since 2022.
The volatility was exacerbated by reports from the Wall Street Journal that President Donald Trump was willing to end the US military campaign against Iran, even if the crucial Strait of Hormuz remained largely closed. This potential de-escalation initially caused oil to drop, though prices swung back up as market participants considered the continued closure of the strait.
The conflict has effectively choked off supplies of crude, natural gas, and products like diesel to global markets by largely closing the Strait of Hormuz. While Saudi Arabia is pumping record amounts through the Red Sea and the UAE has reopened Fujairah on the other side of the strait, the overall consensus is that the Strait of Hormuz remains more blocked than open for the foreseeable future. Trump has also indicated that the US could target Iranian oil infrastructure.
Central banks globally are convening this week facing renewed inflation threats from the war and surging energy costs. While the Federal Reserve, European Central Bank, and Bank of England are expected to keep borrowing costs steady, the tone will become more cautious as they assess the risk of another inflation shock. Bloomberg Economics economists project oil could hit $140 a barrel if Houthi attacks in the Red Sea continue. US average retail gasoline prices have already rallied above $4 a gallon.
