OIL PRICES RISE FURTHER AS HOPES FOR HORMUZ DEAL DIMINISH

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Agency Report

Oil prices extended their gains on Tuesday as hopes for an agreement to reopen the Strait of Hormuz weakened, raising concerns over renewed inflation and increasing expectations of at least one US interest rate hike this year.

Crude prices have climbed by about 10 per cent over the past week, with the United States and Iran showing little progress towards an agreement on the strategic waterway, despite earlier optimistic remarks from the White House.

The situation worsened on Monday after US President Donald Trump said he would seek compensation from Iran for the conflict as part of any peace negotiations. He cited decades of attacks and killings that he alleged were backed or carried out by Tehran.

Trump’s position came in response to Iran’s demand for war reparations from the United States as a condition for resolving the crisis.

The US president had on Sunday said he was “low-keying” his approach to the conflict, suggesting that he was prepared to allow economic pressure to build rather than launch additional military strikes.

However, the latest exchange between Washington and Tehran has raised concerns that a swift resolution could become more difficult. Both major crude benchmarks gained about five per cent on Monday and advanced by more than one per cent on Tuesday.

“In the absence of any positive headlines on negotiations to reopen the strait, pressure on oil prices has been upward,” BNZ strategist Jason Wong said.

Quintex Intel global strategist Stephen Innes described the situation as an attempt by both sides to exert pressure through the oil market without further military escalation.

“In effect, both sides are trying to weaponise the oil barrel without firing another shot,” Innes said.

He explained that Washington was attempting to restrict Iran’s ability to export crude, while Tehran was applying pressure on the key route through which oil supplies from other producers pass.

“It is quite the game of chicken,” he added.

The possibility of crude prices remaining elevated has also revived concerns about inflation and increased expectations that interest rates could rise.

Although a surprise decline of more than 20,000 US jobs last month eased some expectations of a Federal Reserve rate hike, renewed price pressures from higher oil prices could force the central bank to reconsider its position.

Cleveland Federal Reserve President Beth Hammack said on Monday that a single 25-basis-point rate adjustment would have limited impact on the economy.

“I would say in general, one 25-basis-point move probably doesn’t do a whole lot for the economy,” she told Yahoo Finance.

“So it’s probably some number of (movements). But I don’t want to prejudge what that number is going to be,” she added.

Markets are now awaiting the release of US consumer price data on Wednesday, which could provide fresh clues about the Federal Reserve’s next policy decision.

The continuing US-Iran standoff and rising crude prices came amid mixed trading across Asian markets following a subdued session on Wall Street.

Hong Kong, Shanghai, Wellington, Mumbai, Bangkok and Jakarta recorded losses, while Seoul, Sydney, Singapore, Taipei and Manila posted gains. London and Frankfurt opened higher, while Paris was largely unchanged.

Tokyo remained closed for a public holiday.

As of about 0715 GMT, West Texas Intermediate crude was up 1.5 per cent at $83.37 per barrel, while Brent crude gained 1.3 per cent to $88.85 per barrel.

The Hang Seng Index fell 1.0 per cent to 25,679.98, while the Shanghai Composite declined 0.8 per cent to 3,934.09.

In Europe, London’s FTSE 100 rose 0.1 per cent to 10,872.52.

In currency trading, the euro weakened to $1.1535 from $1.1543 on Monday, while the pound slipped to $1.3505 from $1.3508. The dollar declined to 159.22 yen from 159.31 yen, while the euro fell to 85.42 pence from 85.45 pence.

In New York, the Dow Jones Industrial Average ended 0.1 per cent lower at 53,975.98.

AFP