Oil prices jumped on Monday as renewed military tensions between the United States and Iran heightened concerns over global energy supplies, while investors increased bets on a possible US interest rate hike following hawkish remarks from Federal Reserve official Kevin Warsh.
The renewed conflict came as financial markets remained focused on the US Federal Reserve’s fight against persistent inflation, which has been driven in part by elevated energy costs.
Speaking at the Jackson Hole symposium of central bankers and economists in Wyoming, Warsh warned that the Fed must see clear and sustained progress on inflation before easing its stance.
“We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do,” he said.
US inflation currently stands at 3.7 per cent, significantly above the Federal Reserve’s two per cent target. Warsh described the level as “concerning” and said he would be “hard-pressed” to characterize current financial conditions as restrictive.
His comments triggered speculation that borrowing costs could rise, although he stopped short of explicitly endorsing a rate hike.
“I stand here today committed to a discipline, not to a decision,” Warsh said.
The remarks sent short-term US Treasury yields higher and boosted the dollar, while gold prices declined. All three major US stock indexes also ended lower on Friday.
Asian markets were mixed on Monday, with Tokyo, Hong Kong, Sydney, Taipei, Jakarta and Mumbai closing lower, while Seoul, Shanghai, Singapore, Bangkok and Wellington recorded gains.
European markets also opened unevenly, with Paris rising and Frankfurt slipping. London markets were closed for a public holiday.
Oil Market Hit by Renewed Conflict
Oil prices received another boost from the latest escalation in the US-Iran conflict.
The United States said it had attacked Iranian rocket launchers on a small island in the Strait of Hormuz, marking its first strikes on Iran in a month. Tehran subsequently retaliated by targeting US military positions in Jordan.
Both major crude benchmarks gained more than two per cent during Monday’s trading.
West Texas Intermediate crude rose 2.5 per cent to $85.51 a barrel, while Brent crude climbed 2.8 per cent to $90.53.
The escalation has revived concerns over the Strait of Hormuz, a crucial global shipping route through which roughly a fifth of the world’s crude oil and natural gas supplies pass.
Analysts warned that renewed hostilities could quickly restore the geopolitical risk premium in oil prices after crude had surrendered some of its earlier gains as tensions appeared to ease.
“Hormuz is once again threatening to put a floor under oil just as Warsh is putting a ceiling on how much inflation patience markets should assume from the Fed,” said Stephen Innes of Quintex Intel.
Markets Await Key US Economic Data
Investors are now turning their attention to a series of important US economic reports expected over the next two weeks.
Employment data due this week and the consumer price index report scheduled for next week are expected to play a major role in determining expectations for the Federal Reserve’s next policy decision.
Chris Weston of Pepperstone said a weaker-than-expected or broadly in-line jobs report could make next week’s core inflation figures the key factor influencing market expectations.
Invesco’s David Chao, however, said he did not expect a September rate hike despite the increased possibility following the Jackson Hole speech.
“The upcoming inflation and labour market reports will be critically important,” he said.
The combination of higher oil prices, persistent inflation and uncertainty over US monetary policy is expected to keep global financial markets volatile in the coming weeks.
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