Oil prices surged following renewed hostilities between the US and Iran and President Donald Trump's proposal to impose a 20% fee on cargo transiting the Strait of Hormuz. US West Texas Intermediate (WTI) futures for August delivery rose 2.27% to $79.91 per barrel, while international benchmark Brent crude futures for September delivery climbed 2.14% to $85.11, extending gains after a 9.6% advance in the previous session. These increases come amidst a backdrop of escalating military strikes and a reinstatement of blockades on Iranian ports, undermining earlier expectations for a comfortably supplied global oil market.
The proposed 20% fee, estimated by Lipow Oil Associates to add approximately $16 per barrel to oil shipped through the strait, is seen less for its direct cost and more for the heightened risk it signals. Analysts like Henry Hoffman of Catalyst Energy Infrastructure Fund warn that falling vessel traffic, which dropped significantly with only 14 ships crossing the waterway compared to 37 a week earlier, could force producers to cut output if storage fills up due to an inability to export. This could lead to a much greater effective supply loss than initially anticipated.
The escalation has also prompted warnings from Citi, which stated that implementing the fee could materially increase the risk of a broader military confrontation. Citi analysts also suggested that the Iranian regime might withdraw from the recent memorandum of understanding (MoU) with the US until after the US mid-term elections, a scenario that would likely lead to "higher for longer oil prices." This uncertainty, combined with attacks on Emirati oil tankers and fresh missile alerts in Bahrain, has caused war risk premiums for the Strait of Hormuz to sharply increase, with shipowners pausing transit decisions. The conflict is threatening to disrupt oil supplies even as Asian demand, particularly from China, might be recovering, creating a challenging environment where Middle Eastern supplies become less dependable. Saudi Aramco recently cut prices by $11 per barrel to a $1.50 discount versus the Oman/Dubai benchmark, which should encourage Chinese refiners to increase purchases after imports fell sharply during the initial disruption.
Rising oil prices are also fanning concerns about inflation and their potential effect on Federal Reserve monetary policy. The yield on the benchmark US 10-year note rose 5.06 basis points to 4.62%, and the two-year note's yield, which often mirrors Federal Reserve interest rate expectations, rose 6.71 basis points to 4.275%, hitting its highest yield since February 2025. Precious metals prices also fell due to worries about higher-for-longer US interest rates, with spot gold falling 3% to $3,998.52 an ounce and spot silver down 3.8% to $57.56 an ounce.
