Oil prices surged by approximately 4% on Monday, with Brent crude reaching $78.82 a barrel and US-traded oil (WTI Crude) rising to $74.36 a barrel. This increase follows a weekend of intense US strikes on Iran and retaliatory Iranian attacks on five US allies. This marks a significant reversal from June, when prices had returned to pre-conflict levels after a memorandum was signed between the US and Iran, aiming for de-escalation.
The renewed escalation has destabilized what analysts, like Fabien Yip of IG, described as a "fragile US-Iran arrangement." Oil prices are now about 9% higher than before the initial US and Israel strikes in late February. Market experts, such as Mukesh Sahdev from XAnalysts, predict Brent crude will remain in the upper $70s during August and September due to heightened geopolitical uncertainty. However, despite the current turmoil, analysts like Yip do not anticipate oil prices returning to the much higher levels seen earlier in the war, citing slow demand recovery and ongoing barrel additions from stranded-tanker releases and OPEC+ output quota expansions.
A major point of contention and market concern is the status of the Strait of Hormuz. Iran claims the strait is closed, while the US insists it remains open. Despite varying claims, maritime traffic in the strait has sharply declined, with vessels reportedly getting through at significantly reduced levels or opting for a southern route hugging Oman's coastline, supported by the US military. This disruption has led to fears of renewed oil supply tightness through the third quarter, impacting global trade and causing equity and bond markets to fall in Asia and Europe as investors price in protracted disruption.
The broader market reaction includes softer equity futures, lower Treasuries, and a firmer US dollar, indicating that investors are primarily trading on the inflationary consequences of the escalation rather than the direct impact of the conflict itself. The re-escalation jeopardizes the interim ceasefire agreement from last month, which hoped to reopen the strait and facilitate a permanent end to the conflict. US Central Command reported dozens of strikes on Iran, targeting air defense systems, radar sites, missile and drone equipment, and small boats, with Iran retaliating against US allies in the region including Bahrain, Kuwait, Qatar, Jordan, and Oman. UN Secretary-General António Guterres has warned that a return to full-scale hostilities would have catastrophic consequences.
