Oil rises as US-Iran conflict puts Hormuz supply route in focus

Oil prices rose more than 2% on Wednesday as the United States carried out an eleventh consecutive night of strikes against Iran and talks between Washington and Tehran remained stuck over the Strait of Hormuz. Brent crude futures for July delivery were up 2.5% at $93.46 at 3:26 a.m. ET, while front-month U.S. West Texas Intermediate futures gained 2.5% to $86.46, according to CNBC market data.

The move kept attention on one of the world’s most important energy shipping routes. The Strait of Hormuz links the Persian Gulf with global markets, and disruption there can affect crude and other commodity flows because tankers use the waterway to move supplies from major Middle Eastern producers.

U.S. Secretary of State Marco Rubio, speaking at the ASEAN Foreign Ministers’ meeting in the Philippines on Wednesday, said Washington remained open to diplomacy but accused Iran of breaching an agreement concerning the strait.

“The problem we’re having right now is that they’re not serious about talks,” Rubio said. “If they’re serious, we’re serious. If they’re not, then we will do what is necessary to protect our interests and also the interests of our allies.”

Strait of Hormuz remains central to dispute

Rubio said the strait remained a point of contention in bilateral talks and alleged that Iran “demands the right” to control the waterway. He said such an outcome would create “a very dangerous precedent” for the world.

U.S. Central Command said its forces targeted Iranian military operations centers, maritime capabilities, aircraft hangars, drone storage facilities and military logistics infrastructure. Centcom said the strikes were carried out to “further degrade Iran’s ability to threaten commercial shipping in the Strait of Hormuz.”

The escalation added to a market already sensitive to geopolitical supply risks. Deutsche Bank’s Jim Reid wrote in a Wednesday note that, with no breakthrough on Iran, market attention had returned to inflation after Brent closed above $90 a barrel for the first time in more than a month. Reid said the further rise above $92 showed “little sign of oil prices easing” after the United States confirmed another night of strikes.

Higher energy costs can feed into inflation through fuel, transport and production expenses, complicating central bank decisions when price pressures are already a concern. Reid said investor expectations for tighter Federal Reserve policy had increased as oil moved higher.

According to Reid, the probability of a July rate increase had risen to 26% by Tuesday’s close, the highest level since the prior week’s weaker-than-expected U.S. consumer price index report. He said that probability had stood at 45% before the CPI data and fell as low as 10% afterward.

By Wednesday morning, money markets assigned a 24.1% probability to a Federal Reserve rate increase this month and a 69% chance of at least a quarter-point rise in September, according to CME’s FedWatch tool.

Supply risks extend beyond the Gulf

ING analysts said in a Wednesday note that energy markets faced “mounting supply risks” as hopes for a temporary ceasefire between the United States and Iran faded.

The bank also pointed to strains outside the Middle East. ING said Russia’s CPC terminal in the Black Sea had stopped receiving oil from Kazakhstan, with loadings suspended after continuing attacks on tankers. The analysts said a prolonged suspension would increase the chance that Kazakhstan would have to reduce upstream production.

ING said volumes shipped through the CPC terminal were significant, with about 1.7 million barrels per day loaded in June.

This story draws on original reporting from CNBC.