Oil surges above $97 as fragile U.S.-Iran ceasefire lifts Treasury yields

Oil prices surged above $97 a barrel and Treasury yields climbed as the U.S.-Iran ceasefire appeared increasingly fragile, with the Strait of Hormuz remaining closed and fresh military exchanges reviving inflation concerns.

Brent crude futures jumped $6.02, or 6.6%, to $97.14 a barrel Monday after Iran's Tasnim news agency reported Tehran's negotiating team had halted message exchanges with the United States and that allied forces were considering measures to completely block the Strait of Hormuz. U.S. West Texas Intermediate rose $6.68, or 7.7%, to $94.04. The rally extended into Tuesday, with Brent touching $97.73 after the U.S. conducted strikes against Iran and Iran fired missiles toward Kuwait and Bahrain, according to U.S. Central Command.

"The market is currently focused on whether there's any concrete progress or setbacks in U.S.-Iran negotiations, the tone and substance of statements from both sides, and actual physical tanker movements through the waterway," said Tim Waterer, chief market analyst at KCM Trade.

The 10-year U.S. Treasury yield rose 3.6 basis points to 4.491%, while the two-year yield added 3.4 basis points to 4.084%, according to Tradeweb. The WSJ Dollar Index gained 0.3%. Eurozone bond yields followed suit, with the German 10-year Bund yield rising 2.4 basis points to 2.998% and the UK 10-year gilt yield climbing 3.8 basis points to 4.896%. The moves came as the ADP National Employment Report showed U.S. private employers added 122,000 jobs in May, beating the Wall Street Journal consensus of 110,000, reinforcing bets the Federal Reserve will hold rates higher for longer.

The Strait of Hormuz handles about a fifth of global oil and liquefied natural gas flows. Iran has effectively halted nearly all non-Iranian shipping through the waterway since the war began more than three months ago, driving oil prices up by 50% or more. The last time a major oil chokepoint faced a sustained closure of this magnitude was during the 1980-1988 Iran-Iraq Tanker War, when Brent crude traded between $30 and $40 a barrel — equivalent to roughly $90 to $120 in today's inflation-adjusted terms.

Oil's inflation feedback loop

Higher energy prices are feeding directly into inflation expectations, complicating the outlook for central banks. Eurozone core inflation came in at 2.5% in May, above the 2.4% consensus, while headline inflation accelerated to 3.2% from April. The European Central Bank faces a dilemma: cutting rates into an oil-driven price spike risks embedding inflation, while holding steady could choke a fragile recovery.

"Oil prices have effectively become the primary near-term directional driver of U.S. Treasury yields," Standard Chartered strategists Steve Englander and John Davies said in a note. "The U.S. Treasury market is focusing on inflation rather than growth risks from high oil prices."

U.S. crude exports climbed to a record 5.6 million barrels per day in May as the Middle East crisis pushed up demand from Asian and European refiners, ship tracking estimates showed. Meanwhile, global oil inventories could hit critically low levels just ahead of peak summer demand if stock draws continue at their current pace, the head of the International Energy Agency's oil industry and markets division said Tuesday.

President Donald Trump said Monday that negotiations with Iran were continuing and that he expects a deal to extend the ceasefire and reopen the Strait of Hormuz "over the next week." But Iran's Foreign Ministry spokesperson Esmaeil Baghaei attributed the delay in diplomacy to a lack of trust, Washington's contradictory positions and Israel's attacks on Lebanon. Lebanon announced a partial ceasefire between Hezbollah and Israel on Monday, though Israel kept up strikes on southern Lebanon the following day.

Goldman Sachs said weak oil demand in China and Europe poses a major downside risk to its fourth-quarter Brent forecast of $90 a barrel and WTI forecast of $83, though Middle East supply disruptions could still push prices higher. An Abu Dhabi state oil company executive said August could mark a tipping point for much higher prices if demand picks up and the supply crisis persists.

This article is for informational purposes only and does not constitute investment advice.