Oil prices extended their recent gains on Tuesday as hopes for a deal between the United States and Iran to reopen the Strait of Hormuz weakened, raising fresh concerns about inflation and the possibility of further US interest rate increases.
Crude prices have risen by about 10 per cent over the past week as Washington and Tehran appear no closer to resolving the standoff over the strategic waterway, despite earlier positive signals from the White House.
Brent crude futures fell 10 cents, or 0.11 per cent, to $87.62 a barrel by 0405 GMT, while US West Texas Intermediate crude futures declined five cents, or 0.06 per cent, to $82.08 a barrel.
The latest development came after US President Donald Trump said on Monday that he would seek conflict compensation from Iran as part of any peace negotiations.
Trump cited attacks and killings over several decades that he alleged were backed or carried out by Tehran.
His comments came in response to Iran’s demand for US war reparations as a condition for resolving the crisis.
A day earlier, Trump said 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 between Washington and Tehran has raised concerns that an agreement to reopen the Strait of Hormuz could take longer to achieve.
Both major crude benchmarks rose by about five per cent on Monday before extending their gains on Tuesday.
“In the absence of any positive headlines on negotiations to reopen the strait, pressure on oil prices has been upward,” said Jason Wong of BNZ.
Stephen Innes, global strategist at Quintex Intel, described the situation as both sides attempting to use oil as leverage without escalating to further military action.
“In effect, both sides are trying to weaponise the oil barrel without firing another shot. 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,” Innes said.
“It is quite the game of chicken.”
The prospect of sustained high oil prices has also revived inflation concerns and increased expectations that the US Federal Reserve could raise interest rates at least once this year.
A surprise loss of more than 20,000 jobs in the US economy last month had eased expectations of a rate increase, but renewed price pressures from higher energy costs could alter the outlook.
Cleveland Federal Reserve President Beth Hammack said on Monday that a single 25-basis-point rate move would probably have limited impact on the economy.
“I would say in general, one 25-basis-point move probably doesn’t do a whole lot for 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 told Yahoo Finance.
Markets are now awaiting the release of US consumer price data on Wednesday, which could provide further clues about the Federal Reserve’s next policy decision.
Asian equities were mixed after a subdued session on Wall Street.
The Shanghai Composite fell 0.5 per cent to 3,948.19, while Hong Kong’s Hang Seng Index gained 0.1 per cent to 25,946.16.
Tokyo’s Nikkei 225 was closed for a holiday, while markets in Sydney, Singapore and Seoul recorded gains. Wellington, Taipei and Manila declined.
At about 0215 GMT, West Texas Intermediate was up 0.3 per cent at $82.40 a barrel, while Brent crude gained 0.3 per cent to $87.97 a barrel.
The euro rose to $1.1546 from $1.1543, while the pound strengthened to $1.3512 from $1.3508. The dollar fell to 159.18 yen from 159.31 yen, while the euro rose slightly to 85.46 pence against the pound.
On Monday’s close, the Dow Jones Industrial Average fell 0.1 per cent to 53,975.98, while London’s FTSE 100 declined 0.4 per cent to 10,862.50.
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