Crude gains fuel inflation fears and expectations of US interest rate rises
Oil prices extended recent gains on Tuesday as hopes of a reopening of the Strait of Hormuz weakened, raising fresh concerns about inflation and increasing expectations of at least one US interest rate rise this year.
Crude prices have risen by about 10% over the past week, with the United States and Iran appearing no closer to reaching an agreement over the strategically important waterway despite earlier positive signals from the White House.
Brent crude futures were down 10 cents, or 0.11%, at $87.62 a barrel by 0405 GMT, while US West Texas Intermediate crude futures fell five cents, or 0.06%, to $82.08 a barrel.
The latest setback came after US president Donald Trump said on Monday that he would seek compensation from Iran for conflicts as part of any peace negotiations, citing attacks and killings over several decades that he alleged were backed or carried out by Tehran.
Trump’s comments followed a demand from Iran for US war reparations as a condition for resolving the crisis.
The president had said a day earlier that he was “low-keying” his approach to the conflict, suggesting that he was prepared to rely on economic pressure rather than launch further military strikes.
The latest exchange, however, appears to have reduced the prospects of a swift agreement. Both major crude benchmarks rose by about 5% on Monday before extending their gains in early Asian trading on Tuesday.
“In the absence of any positive headlines on negotiations to reopen the strait, pressure on oil prices has been upward,” Jason Wong of BNZ said.
Stephen Innes, global strategist at Quintex Intel, said both sides were effectively using oil as an economic weapon without escalating the conflict militarily.
“Washington is trying to choke Iran’s ability to get its crude out, while Tehran is squeezing the artery through which everybody else’s crude gets through,” he said.
“It is quite the game of chicken.”
The prospect of sustained higher oil prices has revived concerns about inflation and increased expectations of further interest rate rises.
A surprise loss of more than 20,000 jobs in the US economy last month had eased expectations of a Federal Reserve rate increase, but renewed price pressures could force the central bank to reconsider its position.
Cleveland Federal Reserve president Beth Hammack told Yahoo Finance on Monday that a single 25-basis-point rate increase would probably have only a limited effect on the economy.
“So it’s probably some number of (movements). But I don’t want to prejudge what that number is going to be,” she said.
Markets are now awaiting the release of US consumer price data on Wednesday, which could provide important clues about the Federal Reserve’s next policy decision.
Asian equity markets were mixed after a subdued session on Wall Street.
Stocks fell in Shanghai, Wellington, Taipei and Manila, while markets in Hong Kong, Sydney, Singapore and Seoul recorded gains. Tokyo was closed for a public holiday.
At 0215 GMT, the Hang Seng index in Hong Kong was up 0.1% at 25,946.16, while the Shanghai Composite had fallen 0.5% to 3,948.19.
West Texas Intermediate was up 0.3% at $82.40 a barrel and Brent crude was 0.3% higher at $87.97.
The euro was trading at $1.1546, compared with $1.1543 on Monday, while the pound stood at $1.3512 against $1.3508.
In New York, the Dow Jones Industrial Average fell 0.1% to close at 53,975.98, while London’s FTSE 100 dropped 0.4% to 10,862.50.