Oil prices rose for a second straight session on Tuesday, with Brent crude futures up about 1.6 percent to $107 a barrel and US West Texas Intermediate up 1.4 percent to $94, as supply disruption fears from the seven-month US-Iran conflict outweighed signs that Gulf crude exports are actually recovering.
The gains extended Monday’s rally, when Brent closed nearly a dollar higher after President Trump rejected an Iranian proposal to reopen the Strait of Hormuz and refused to rule out further strikes on Iran. US and Iranian officials have separately held talks with mediators in a renewed attempt to end the war, and further discussions are expected to center on an amended version of a seven-day proposal Iran presented last week on the sidelines of the United Nations General Assembly. Neither side has signaled a breakthrough.
Exports rising, prices rising anyway
The puzzle in the market is that physical supplies are improving. Crude exports from major Middle Eastern producers climbed to 12.8 million barrels a day in September, the highest since February, according to preliminary data from Kpler, driven by higher shipments from Saudi Arabia and the United Arab Emirates.
Traders are not convinced the recovery is durable. Tim Waterer, chief analyst at KCM Trade, said a clearer picture is emerging of higher export volumes leaving the Gulf, but much of that increase still relies on workarounds such as ship-to-ship transfers. Those methods are less efficient and more costly than normal operations, which is why crude prices remain elevated. The Strait of Hormuz, which carries roughly a fifth of the world’s seaborne oil, remains the focal point of the risk premium.
Banks lose their baseline
The uncertainty has made forecasting difficult for the banks that usually set the consensus. JPMorgan said it had lost visibility on the market and, for the first time since the war began in February, no longer has a clear baseline scenario. The bank said the escalation in tensions was adding to concerns over an already worsening supply shock.
We simply do not know how to model the endgame, JPMorgan analysts wrote, pointing out that many of the economic thresholds the bank assumed the US administration would not cross have been crossed six months into the war, with still no clear exit strategy. Goldman Sachs outlined a scenario in which oil could reach $120 a barrel if attacks on vessels in the Middle East intensify, while expecting prices to move back toward $80 if exports return to normal. Daan Struyven, co-head of global commodities research at Goldman, said recent attacks showed disruptions to shipping could spread and become more severe.
Fallback to equities and bonds
The oil move is feeding directly into rates and equities. The 10-year Treasury yield reached about 5.27 percent overnight, its highest level since 2007, and the S&P 500 posted its worst day since August on Monday, closing down 0.8 percent. Traders have added to bets on further Federal Reserve rate hikes, which the central bank signaled with a 25 basis point increase to 3.75 to 4 percent this month, its first in three years.
Asian equities fell in Tuesday trading as the yield spike spread. Indian markets were hit hardest in the region: the Sensex dropped more than 1,000 points on Monday to a three-month low, the rupee sank toward 96 against the dollar before state banks intervened, and India’s benchmark bond yield climbed to 7.18 percent, the highest since April 2024. India, the world’s third-largest crude importer, is among the most exposed economies to a sustained move above $100 oil. Kranthi Bathini, an equity strategist at WealthMills Securities, said crude above $100 exerts significant selling pressure on the Indian market in the short to medium term, echoing the early months of the conflict.
UOB analysts said in a client note that the dominant risk remains the US-Iran standoff and its implications for energy prices and inflation expectations. Iranian officials have reportedly expressed pessimism about reaching a deal before the Strait of Hormuz situation escalates further, keeping supply uncertainty elevated. Jose Torres of Interactive Brokers described the Washington and Tehran impasse as roiling markets to start the week, with the geopolitical premium bolstering oil prices and worrying Wall Street that the Fed will tighten policy to constrain inflation.
What to watch
Attention turns to Wednesday’s US PCE inflation report, the Fed’s preferred gauge, which will either confirm or ease the rate-hike bets now weighing on every risk market. Before that, any sign of progress or collapse in the mediated talks could move crude by several dollars in either direction. Reports earlier this week that Iran had shown flexibility on nuclear issues, and that the US might offer sanctions relief and release frozen funds, were denied by both an Iranian official and by Trump himself, who posted that the story was untrue and that he had offered Iran nothing.
The conflict began in late February with US and Israeli attacks on Iran and has repeatedly rattled energy markets through the Hormuz chokepoint. Insurance rates for tankers transiting the strait have surged multiples of normal levels, according to Lloyd’s reporting, adding a persistent cost to every barrel that does move. Six months in, with exports recovering but prices climbing anyway, the market is pricing the risk of escalation rather than the current flow of barrels. Until that changes, every headline out of New York or Tehran moves the tape, and the next test of that reflex is Wednesday’s inflation print.