Brent Crude Touches $95 as Trump Rules Out Talks With Iran

Brent crude touched $95 a barrel on Wednesday morning as investors priced in the risk that the widening war in the Middle East will disrupt global supply.

The international benchmark rose 4.6% to $95.16, its highest point in six weeks. Oil has now climbed roughly 20% this month as Washington and Tehran have exchanged fire.

The immediate trigger was political rather than physical. Overnight the US carried out its eleventh consecutive night of strikes against Iran, while the Iran-backed Houthi movement threatened a naval blockade on Saudi Arabian ports. But traders reacted most sharply to Donald Trump's comments the previous evening ruling out fresh talks with Tehran.

"The rise in the oil price comes after President Trump played down the prospect of fresh talks with Iran," said Kathleen Brooks of the broker XTB. "He also said that he would escalate tensions even further and will hit Iran's Pickaxe Mountain, which contains an underground nuclear site."

Brooks said the market's preference was clear. "Reports suggest that US allies in the Gulf are getting tired of US strikes on Iran due to their ineffectiveness, however, there is no immediate solution to break the impasse. Should there be a wider war to bring Iran to its knees, or should the two sides commit to fresh peace talks? Markets would likely prefer fresh peace talks, especially now that the crisis is impacting global oil flows beyond the Strait of Hormuz."

That last point is the one that has changed the calculation. Until recently the risk was concentrated in Hormuz. Now there are signs that tankers are avoiding or slowing their approach to the Bab al-Mandeb strait near Yemen, after the Houthis threatened attacks on cargo ships in alliance with Iran. The Red Sea remains operational for now, but two chokepoints under threat is a materially different proposition to one.

"Global supply chains are increasingly coming under threat as escalations in the conflict heat up," Brooks said. "This will keep upward pressure on global supply chains, and inflation risks are ramping up every day this conflict escalates."

The oil move landed on the same morning that UK inflation cooled faster than expected, with food inflation slowing to 1.7% as sugar, chocolate and fat prices dropped. Businesses were quick to warn that the slowdown may prove a "false dawn" if energy costs continue to climb, and the chancellor conceded that the government has "much more to do" to help with the cost of living.

For oil-importing economies the arithmetic is unforgiving: a sustained $95 barrel feeds through to transport, freight and manufacturing costs within weeks, and unwinds much of the disinflation central banks have spent the past two years engineering.

Reported from the Guardian.