Oil prices jumped to $105 a barrel on Thursday as attacks on shipping in the Gulf intensified, pushing the probability of a Federal Reserve rate hike next week to 70% and prompting the European Central Bank to raise its main interest rate to 2.5%. The moves reflect mounting concern among investors and policymakers that the US-Iran war will keep energy costs elevated for months, reigniting inflation just as central banks had begun to see progress against it.
Brent crude futures rose $4.05, or four percent, to $105.26 a barrel by 1215 GMT, according to Al Jazeera. US West Texas Intermediate crude topped $100 a barrel for the first time since May, climbing $3.99, or 4.15 percent, to $100.04. Brent has surged more than 30 percent from lows touched in early August, as a permanent ceasefire between the US and Iran never materialised and fighting resumed.
The war has led to the effective closure of the Strait of Hormuz, the BBC reported, preventing Gulf oil and gas supplies from reaching global markets. Iran said it had attacked 10 ships near the strait on Wednesday, after the US hit five Iranian oil tankers. Iran’s Islamic Revolutionary Guard Corps said it would escalate its response to any further attacks. Iran-aligned Houthi forces also seized Yemen’s port of Mokha, a key Red Sea port, further threatening shipping routes.
PVM analyst John Evans told Al Jazeera that the recent run-up in prices reveals the market’s view that the conflict will last longer than anticipated even a month ago. If oil supply and exports are diminished, Evans said, the oil balance remains tight and prices remain elevated.
Central banks react
The European Central Bank raised its main interest rate from 2.25% to 2.5%, the highest level since March last year, and warned that the risk of higher inflation over the next year has risen following renewed fighting in the Middle East, according to The Guardian. ECB president Christine Lagarde said the central bank believes inflation will be longer lasting than anticipated, and that food inflation, which had remained low at 1.2%, was likely to increase in response to higher oil and gas prices. The ECB now expects inflation to average 3% this year and lifted its forecast for eurozone economic growth in 2026 to 0.9%, up from 0.8% in June. Asked about the ECB’s next move, Lagarde said, ‘We have not debated at all any kind of future path. Markets do what they have to do and we do what we have to do, which is to provide price stability.’
In the United States, traders pushed chances for a Fed rate increase to 70% in morning action, according to CME Group’s FedWatch gauge cited by CNBC. That figure was up from 61% the day before, Al Jazeera reported. Traders also nudged chances of another increase in December to close to 60%. The producer price index rose 0.4% in August, following an upwardly revised 0.1% increase in July, together pushing the annual PPI level to 5.4%, slightly higher than forecast. Jeffrey Roach, chief economist at LPL Financial, wrote that as the conflict with Iran drags on longer than many expected, inflation pressures are becoming increasingly entrenched, leaving investors in search of a catalyst strong enough to change the inflation narrative.
David Russell, global head of market strategy at TradeStation, told CNBC that more pressure is coming because crude and refined products have kept rising since the August data was collected. The ongoing spike in oil, combined with low jobless claims, make it hard for the Fed to not hike next week, Russell said. Bank of America senior US economist Stephen Juneau estimated that core PCE is tracking at a 0.26% monthly rate, which would get rounded up to 0.3%, and said if that estimate holds it should greenlight a hike at next week’s Fed meeting. BofA expects three increases at upcoming meetings, one of the most hawkish forecasts on Wall Street.
The Fed will get its final look at inflation data on Friday when the Bureau of Labor Statistics releases its consumer price index. The Dow Jones consensus is for a headline annual reading of 3.4%, with core excluding food and energy forecast at 2.4%. Fed Chairman Kevin Warsh recently reemphasized that the PCE price index is the central bank’s official yardstick for inflation, which showed core at 3.3% in July and headline at 3.7%. President Donald Trump has consistently lobbied for interest rates to go lower rather than higher, Al Jazeera noted.
Bond yields and gas prices climb
Government borrowing costs soared across major economies. The yield on benchmark 10-year UK government bonds hit 5.36%, the highest since August 2007, The Guardian reported. The rate on Germany’s 30-year government bond rose to 5.08%, the highest since December 2003, while France’s 10-year yield reached its highest level since October 2008 at 4.344%. US Treasury secretary Scott Bessent said the US would buy back $6bn worth of government debt to alleviate a sell-off in the bond market, but bond buyers considered the package inadequate and the yield on 10-year treasuries rose to a three-year high.
Natural gas prices also surged. In the UK, wholesale gas rose above 200p a therm for the first time since the end of 2022, the BBC reported, while The Guardian put the figure at above 203p per therm, the highest since December 2022. The Dutch wholesale gas price, the EU standard, passed €80 per megawatt hour for the first time since January 2023, trading 3.4% higher at €82.56/MWh. Lagarde explicitly acknowledged that gas prices could rise owing to further supply disruptions or an unusually cold winter combined with low storage levels across much of Europe. EU gas stores are only 67% full, well below the five-year average of 84%, as buyers delayed filling reserves in the expectation that the conflict would be resolved and prices would fall before winter.
The human cost is visible at the pump. The average price for a gallon of regular petrol in the US reached nearly $4.28, according to the American Automobile Association, and higher diesel costs are feeding through to all kinds of products moved by truck to store shelves. On Wall Street, the S&P 500 fell 0.6% and is on track for a fourth straight loss. Chris Beauchamp, chief market analyst at IG, told the BBC that it feels like investors worldwide are now waking up to the crisis in oil markets, and warned that the surge in energy prices could weigh heavily on the global economy if it continues.
China could determine how durable the rally proves. China, the world’s largest crude importer, has stepped up purchases in recent weeks after months of subdued demand, boosting physical crude markets, ING analysts said in a note cited by Al Jazeera. If Chinese buying continues to recover, it could amplify the impact of any supply disruptions and drive prices higher, while a pullback in imports could temper market gains. David Jorbenaze, global oil market lead at ICIS, said that for months the bearish case rested on soft Chinese demand. President Trump said at a Republican Party convention in Texas on Wednesday that he did not think the fighting would end until after the US mid-term elections in November, the BBC reported.