Global oil hits $107 per barrel and bond yields surge

Oil surge deepens inflation fears as conflict disrupts vital shipping routes

Sandego.net – Energy markets were hit by a fresh shock on Thursday as escalating military activity around the Middle East pushed global crude prices above $100 a barrel and sent diesel costs to new records. Brent crude climbed to $107.40 a barrel, its highest level since May, while US crude reached $102 for the first time since the same month.

The move reflects growing concern that the Iran war could cause longer-lasting damage to energy production and maritime transport than markets had initially expected. Fighting has intensified around the Strait of Hormuz and the Red Sea, two waterways central to the movement of oil and other goods. The United States and Iran have exchanged strikes, while Iran-backed Houthi forces have targeted Saudi Arabia and heightened tensions near the Bab al-Mandab Strait.

Brent, the international benchmark, rose 6.1% during Thursday’s trading. US crude gained 6.2%. The sharp increases came as traders weighed the possibility of further interruptions to crude supplies leaving the Gulf and passing through the Strait of Hormuz.

“The step up in attacks in the Strait of Hormuz and by the Houthis against Saudi Arabia suggests that Iran and its proxies are trying to regain the initiative in the war,” Jason Tuvey, deputy chief emerging markets economist at Capital Economics, said in a note.

“This could set back the recovery in oil output in the Gulf and raises the risk that global energy prices rise even further in the coming weeks,” Tuvey said.

A prolonged period of elevated prices

The outlook for Middle Eastern oil output has become more pessimistic. S&P Global Energy said Thursday that it no longer expects production in the region to recover to pre-war levels by the end of next year. Its revised assumptions no longer include a clear conclusion to the conflict or a complete normalization of conditions in the Strait of Hormuz by the end of 2027.

Under that view, oil could remain expensive for an extended period. S&P Global Energy expects prices to hold in an $80 to $100 per barrel range through next year, even if daily price swings remain severe.

That forecast differs sharply from President Donald Trump’s prediction on Wednesday night that the conflict and energy-price pressures will fade rapidly after the November 3 election.

“Prices right after this very important election on November 3rd will be plummeting,” Trump said. “The war will be over very shortly after the election.”

For investors, the central issue is no longer simply whether oil can move through the region on a given day. It is whether shipping risks, threats to production and uncertainty surrounding the conflict will become a durable feature of the global energy market.

“It is adjusting to the new normal defined by unresolved conflict and persistent Maritime risk,” Jim Burkhard, global head of crude oil research at S&P Global Energy, said in the report.

Diesel costs bring the pressure closer to households and businesses

Crude oil prices matter widely, but the jump in refined fuels may carry even more immediate consequences. Diesel is essential to trucking, shipping, industrial activity and many supply chains. The national average diesel price reached a record $5.98 per gallon on Thursday, AAA data showed.

Higher diesel prices can raise the expense of moving food, consumer products and industrial materials. That makes diesel a particularly important signal for businesses and households trying to understand how an oil-market shock may travel through the broader economy.

Claudio Galimberti, chief economist at Rystad Energy, said the escalation in refined-product prices is more troubling than a rise in crude alone because businesses, consumers and industry directly rely on fuels such as diesel.

The current price environment therefore creates risks beyond filling stations. Companies facing larger transportation and operating costs may confront pressure on margins, while consumers could see the effects through the prices of delivered goods and services.

Bonds and stocks react to the inflation threat

The oil rally fed directly into concerns that inflation could prove more difficult to contain. New figures also showed headline wholesale inflation accelerated in August, adding to market anxiety over the outlook for interest rates.

Government bonds sold off sharply on Thursday. The benchmark 10-year Treasury yield increased nine basis points to 4.92%, the highest level since October 2023. Yields rise when bond prices fall, and the move underscored investor worries that higher energy costs could keep inflation elevated and require tighter monetary policy.

The Treasury Department had announced Wednesday that it would buy back as much as $6 billion in bonds on Thursday, an effort that could relieve some pressure in the market. But investors questioned whether that amount would materially change the broader path of yields.

“Treasury is figuratively shooting a BB gun at an elephant,” Mike O’Rourke, chief market strategist at JonesTrading, said in a note.

Expectations for the Federal Reserve also shifted rapidly. Traders placed a 72% probability on an interest-rate increase at the central bank’s meeting next week, up from 61% on Wednesday and 49% one week earlier, CME FedWatch showed.

US stocks fell for a fourth consecutive session. The S&P 500 declined 0.5% and stood more than 2.5% below the record high it reached on August 13. With corporate earnings season nearing its end, investors are increasingly focused on the war, rising borrowing costs and the Federal Reserve’s next decision.

The market reaction illustrates how a conflict centered on critical maritime routes can affect far more than oil producers. As crude, diesel and bond yields move higher together, the implications extend to inflation, transport costs, business planning and the outlook for interest rates in the months ahead.