Oil prices climbed above $111 a barrel on Tuesday as rising concerns over stalled diplomatic efforts in the Gulf sent energy markets higher and stocks stalled.
Brent crude rose 1.6 percent to $111.57 in early Asian trading, extending a rally that has sent the benchmark up more than 50 percent since Iran effectively blocked the Strait of Hormuz, the chokepoint that once allowed about a fifth of the world’s oil and liquefied natural gas to flow freely.
The immediate trigger was Tehran’s rejection of a US peace proposal on Monday. According to state media, Iran instead published its own ten-point counter plan, which was passed on via Pakistan. Washington’s deadline for a deal expires at 1am UK time on Wednesday and President Trump has made no secret of the consequences, warning that Iran’s infrastructure would be reduced to rubble if a deal fails.
For companies already struggling with increased input costs, the prospect of further escalation is deeply unwelcome. The International Energy Agency has called the closure of the strait the most serious supply disruption in the history of the global oil market. Brent futures hit nearly $120 a barrel last month as regional energy resources came under attack.
Some commodity analysts are going even further, warning that a prolonged conflict could drive prices as high as $200 a barrel, a scenario that would dwarf the energy shocks of the 1970s and seriously hurt margins in transportation, manufacturing and retail sectors.
The stock markets reflected the uncertainty. The FTSE 100, which reopened after the Easter holidays, was virtually unchanged at 10,425, while bourses in Frankfurt and Paris posted only modest gains. In Tokyo, the Nikkei closed little changed.
Vasu Menon, managing director of investment strategy at OCBC in Singapore, captured the prevailing sentiment, noting that any U.S. attacks on Iran’s energy infrastructure would represent a significant escalation, raising the specter of retaliation against Gulf energy assets.
For UK businesses exposed to global supply chains, the next 24 hours could prove crucial. An agreement would bring some relief to energy markets; A failure in the talks would almost certainly drive oil prices significantly higher and add to the pressure on an already strained global economy.
